Under Armour Inc. (ticker: UA, UAA) stock is a great example of why being an informed investor — even on boring issues like corporate governance — can help with stock selection.
Owning a share of stock simply means you own a slice of a given company. As with any business, being an owner means you have a say in the way the company is run and you’re entitled to a taste of the economic successes.
Under Armour stock, which has two publicly traded share classes, functions a little differently.
Understanding the differences between UA vs. UAA share classes is important for all shareholders, not just investors in the athletic apparel company.
Here are the main points to consider when you are thinking about investing in Under Armour, or any other stock with a dual-class structure:
— UA stock vs. UAA stock differences.
— The rationale behind Under Armour’s two stock classes.
— The future of dual-class shares.
— Should you buy UA or UAA stock?
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UA Stock vs. UAA Stock Differences
The most striking difference between UA stock and UAA stock is that the former has no voting rights, while the latter has one vote per share. The ticker “UA” represents Class C shares, while “UAA” represents Class A voting shares.
When there are two classes of stock, this is known as having a dual-class share structure. The structure has one purpose, and it’s to dilute the voting rights of public shareholders.
This is why Under Armour stock, and others employing the same measures, are bad examples of what ownership usually means: Company insiders are attempting to only give public shareholders an economic interest in the business, while ceding nothing or very little when it comes to voting rights determining how the business is run.
The fact that UA shares, which have no ability to cast votes on shareholder matters, aren’t worthless is purely because UA investors are still entitled to their share of future earnings.
But Wall Street doesn’t view the two share classes equally; Class A shares and their one vote currently trade at about a 15% premium over the Class C shares which offer zero voting rights. The two classes of stock have existed since a stock split in 2016 that gave Class A shareholders a share of Class C stock for each A share they owned. It was effectively a 2-for-1 split, but with vote dilution.
On its face, it makes sense that UAA would trade at a premium, and since 2016 that premium has largely been somewhere between 8% and 18%, so a 15% premium is on the higher side. In truth, however, there’s almost no practical difference between UA and UAA stock, even from the voting perspective.
That’s because there’s a third share class, Class B shares, which aren’t traded publicly and are owned entirely by Under Armour founder and executive chairman Kevin Plank. Each Class B share comes with 10 votes. This means that while Plank owns less than 15% of all Under Armour stock outstanding, he controls nearly 65% of the voting power, rendering the votes of Class A shareholders irrelevant.
[See: The Complete Berkshire Hathaway Portfolio.]
The Rationale Behind Under Armour’s Two Stock Classes
Under Armour’s dual-class shares aren’t wholly unique. A number of other prominent public companies have more than one class of shares as well.
Here are just a few of the companies with more than one class of shares, and the voting rights for each:
— Alphabet Inc. (GOOG, GOOGL). GOOGL (Class A): One vote. GOOG (Class C): No votes. Class B shares (privately owned by insiders): 10 votes.
— Berkshire Hathaway Inc. (BRK.A, BRK.B). BRK.A: One vote. BRK.B: 1/10,000th of a vote.
— Brown-Forman Corp. (BF.A, BF.B). BF.A: One vote. BF.B: No votes.
— Facebook Inc. (FB). Class A: One vote. Class B (privately owned): 10 votes.
— Snap Inc. (SNAP). Class A: No votes. Class B (privately owned): One vote. Class C (privately owned): 10 votes.
— Square Inc. (SQ). Class A: One vote. Class B (privately owned): 10 votes.
— Twilio Inc. (TWLO). Class A: One vote. Class B (privately owned): 10 votes.
— VMware Inc. (VMW). Class A: One vote. Class B (privately owned): 10 votes.
— Workday Inc. (WDAY). Class A: One vote. Class B (privately owned): 10 votes.
Dual-class share structures became more popular in the 2010s, as companies increasingly took advantage of investor willingness to sacrifice voting rights. Companies opt for multiple share classes for several simple reasons.
Founders and other insiders often use dual-class share structures to allow a small circle of early employees to exert effective control over operations without having to buy more shares. It can also serve as a great defense against hostile takeover bids and activist shareholder meddling, in which large outside firms buy up enough voting control to put people on the board of directors and directly influence decision-making.
[See: 10 of the Best Stocks to Buy This Year.]
The Future of Dual-Class Shares
While the 2010s were the heyday of the dual-class share structure, its popularity could also be its undoing.
When Snapchat parent Snap Inc. went public in 2017 by issuing non-voting stock, it was a bridge too far for some institutional investors. It caused such commotion and public outcry that the S&P Dow Jones Indices banned new dual-class share offerings inclusion in all of its component indexes, including the vaunted S&P 500.
FTSE Russell, another prominent index company, also moved to exclude companies with low or no voting rights from its indexes in 2017.
So while there’s no regulatory impediment to issuing dual share classes, companies with aspirations of earning entry into the largest indexes — and the liquidity boost that comes with such inclusion — now have to remain with the more democratic, and traditional, approach to shareholder rights.
Should You Buy UA or UAA Stock?
When it comes to the implications for current or prospective Under Armour shareholders, the practical takeaway is that both UA and UAA offer virtually no say over how the company will operate.
With that knowledge — and given the fact that all share classes are entitled to the same economic slice of the business — it actually makes more sense to own the voteless Class C UA stock, especially at a 15% discount to its Class A cousin. Even if Class A shares continue to trade at a premium going forward, the 15% discount currently offered by Class C shares is on the higher side of the historical average, so if the gap reverts to the mean, one would expect UA to outperform UAA.
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Under Armour Stock: UA vs. UAA. What’s the Difference? originally appeared on usnews.com
