A Lennar housing development in San Diego
Courtesy of LennarLennar is one of the country’s leading home builders. It is also among the companies with dual classes of stock—a structure intended to give control to a founder, family, or influential shareholder through supervoting shares.
In the case of Lennar and a few others, the high-vote stock trades at a sharp discount to the lower-vote stock. This offers investors a cheaper way to gain ownership, with the potential bonus of a closing of the gap between the two stocks. Holders also get a slightly higher yield as both share classes pay the same dividend.
Other examples are Brown-Forman and Liberty Broadband and Liberty Formula One, both controlled by media mogul John Malone.
Lennar (ticker: LEN) is notable because its supervoting class B share voting shares (LEN.B) trade at a discount of 25% to the lower-vote class A shares—the largest percentage gap among sizable companies with dual-class stock. The B shares fetch about $55 and the A shares, $73.
The B shares allow investors to align themselves with Lennar’s 63-year-old chairman Stuart Miller, who controls Lennar with a 58% stake in the class B stock, which has 10 votes against one for the A shares.
At the family-controlled distiller Brown-Forman, which has a great long-term record, the voting stock (BF.A) trades around $61, a nearly 10% discount to the nonvoting B shares (BF.B) at $67. A Brown-Forman spokeswoman notes that over the past 40 years, there have been times when the A share commanded a premium to the B and vice versa.
Brown-Forman has long traded at a premium relative to other liquor companies on the strength of its Jack Daniel’s franchise and potential takeover. But the shares are no bargain now, with the nonvoting shares fetching more than 40 times earnings.
High-vote stock is generally less liquid than the lower-vote shares with considerably less public float. With both Lennar and Brown-Forman, their high-vote stocks are not in the S&P 500, giving some institutions little reason to own it.
Indeed, dual-class stock isn’t viewed as good corporate governance. S&P Dow Jones Indices won’t admit such companies to the S&P 500 index or S&P MidCap 400 or SmallCap 600. S&P 500 components like Alphabet (GOOGL) with its multiple classes were grandfathered when the change was made in 2017.
A risk with low-price supervoting stock is that the discount to lower-vote shares may persist—or may even widen—and the controlling shareholder does nothing about it.
Nonetheless, longtime Barron’s Roundtable member Mario Gabelli has often invested in cheaply priced supervoting shares. His firm, Gamco Investors, holds higher-vote stock in Lennar, Brown-Forman, and others.
“In general we try to acquire a unit of economic ownership at the cheapest price; when that coincides with superior voting representation (which theoretically has value), it is a bonus,” says Chris Marangi, co-chief investment officer at Gamco. “Those discounts tend to vary over time and can be resolved in an acquisition or through the ability to convert one share class into another.”
High Vote, Low Price
Here are some companies whose high-vote shares trade at a discount to the lower-vote stock
E= Estimate N/A= Not applicable
Bloomberg; FactSet; company reports
GoodHaven fund manager Larry Pitkowsky holds the Lennar B shares and likes the discount to the A shares and the fact that they trade around book value. Home building has been strong, and the Lennar A shares are up 32% this year, while the B shares have gained 24%. Lennar’s A shares trade for about 12 times estimated 2020 earnings of $6.32 a share, while the B shares fetch around nine times.
“We have been very impressed with management’s execution of a well- articulated business plan to become more capital-light, and while we have had a positive view for the outlook for single-family housing previously, it has lately been reinforced by certain new trends like de-urbanization and work-from-home,” he says.
News Corp, the parent of Barron’s publisher Dow Jones, has two classes of stock, as does Fox, also controlled by the Murdoch family. The Fox and News Corp voting and nonvoting shares trade at close to parity.
The leading proponent of supervoting stock has been Malone, who uses supervoting stock to effectively control or exert considerable sway over a group of companies generally with a sub-10% economic interest. Investors have not seemed to mind ceding control to Malone, given his record of delivering for shareholders. With his Liberty companies, there usually are three classes of stock, thinly traded class B shares that he holds with 10 votes, class A shares with one, and class C stock with a K at the end of the ticker with no votes.
The Liberty Formula One voting shares (FWONA) trade around $34, a 6% discount to the nonvoting shares at $36 (FWONK). Liberty Broadband’s class A stock (LBRDA) trades around $140, a 2% discount to the C shares (LBRDK) at $142.
Liberty Broadband could be the better choice because it offers a discounted way to play Charter Communications (CHTR), the well-run cable TV and broadband company. Liberty Broadband owns a 23% economic stake in Charter and trades at an estimated discount of about 18% to the value of that stake based on the C shares and an even bigger one based on the A shares.
All stock isn’t equal, and where it exists, cheaply priced voting stock can be an attractive play for investors.
Write to Andrew Bary at andrew.bary@barrons.com
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How to Invest in Lennar and Other Dual-Share Companies at a Discount - Barron's
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