Every Wednesday, we publish our “Investor Toolkit” investing advice series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successful investing. Each Investor Toolkit update gives you a fundamental piece of investing advice and shows you how you can put it into practice right away.
Tip of the week: “Sometimes it pays to pay a little extra and get a vote.”
Some Canadian companies, such as Bombardier and Teck Resources, have two classes of common shares: voting and non-voting (or multiple voting and subordinate voting).
The two classes get the same or almost the same dividend. The main difference: holders of voting or multiple-voting shares control the company. Non-voting and subordinate-voting shares only have meaningful voting rights in extraordinary circumstances.
Companies with multiple share classes often have a so-called “coattails provision.” This provision aims to ensure that both share classes have equal rights in the event of a takeover. So, if you hold non-voting or subordinate-voting shares, you won’t miss out on a takeover bid.
Non-voting shares trade more actively than the voters, usually at a slight price discount. But successful investors focus on finding investments that you can stick with indefinitely, so they put a lower priority on liquidity. They may pay a little more for the voting shares. Here’s our investing advice on which class to buy:
Always choose voters if they trade at a premium of 5% or less over non-voters. Chances are you’ll get the premium back when you sell, and the voting stock won’t go below the non-voting. But the voting-stock premium could balloon to 20% or more in a takeover.
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Choose non-voting shares if the voters trade at a premium of 10% or more. If takeover interest wanes, the premium may shrink to 5% or less. If there is a takeover, the coattails provision may apply. If so, the premium on the voting shares should evaporate.
If the voting-stock premium is between 5% and 10%, base your decision on your own temperament and judgment. If you’re an aggressive investor and a takeover bid seems likely, you may prefer the voting stock.
Whenever premiums exceed 5%, however, many conservative investors routinely choose the cheaper non-voters. They see themselves as investors, not gamblers.
Next Wednesday, December 29, 2011, Investor Toolkit will give you our investing advice on how to diversify your portfolio.
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