Corporate Accounting by Example: Dual Share Classes (#1)
Sometimes it pays to be low class
Dear Reader,
Dual-class share structures, common among family-controlled businesses, typically trade with a discount for governance risk. However, sometimes non-voting / “lower” class shareholders are getting a fair trade for their lack of control.
Consider VLGEA 0.00%↑ , a regional grocery chain. It has 10.631 million class A shares and 4.125 million class B shares with 10x voting rights. (The family can convert their shares to class A at-will. Liquidation rights are 1:1.)
Seems pretty unfair, right?
Well hold on a second…class B shares receive a 35% haircut on dividends. As far as I know, this is the largest such discount in the U.S. market. Bizarrely, despite this perverse management incentive of essentially underpaying themselves (or overpaying shareholders, depending on your perspective), VLGEA 0.00%↑ is a dividend stalwart with a modest payout and sporadic history of specials.
So how does this show up in earnings?
We just need to know where to look at and what we’re looking at:
Optimistic: The company reports 2025Q1 basic earnings of $.84 per class A share as if all earnings will eventually be div’d out. This is a combination of optimistic, naive, and short-sighted — it assumes that management runs this strictly as an income play, perpetually, without ever wanting to partake more themselves via converting shares to the higher dividend.
Conservative: The company reports diluted earnings of $.75 and yes, this “dilution” does include the full impact of converting all the B shares.
A reasonable assumption is somewhere inbetween, implying perhaps 5% to 10% valuation boost relative to relying on GAAP diluted earnings strictly. Not a huge gamechanger, but a nice tailwind to have in a stock that is arguably already pretty cheap and showing solid operating trends. But that’s a discussion for another post entirely…