Be Careful and Know What You're Buying
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last week I added BHP Billiton Limited (NYSE: BHP) to my “No Drip, No Mess” Portfolio and a commenter brought something to my attention that I wasn’t aware of. I thought that my research on the subject would be of value. Unbeknownst to me despite personally holding shares of BHP for about five years was that their shares are dual listed and one of those listings trades at a fairly large discount. In addition to the Limited shares I recommended, investors have the ability to invest in BHP Billiton PLC (NYSE: BBL). The question is, which ticker should you choose?
First, a little bit of background and context. When a commenter going by the screen name of “Klbjcb” wrote, “Mathew, why would you not buy BBL -- they withhold 35% taxes (yes, you can get credit on taxes here in US) on BHP. You pay $0 on BBL -- they are a dual listed company -- same dividend but BBL trades at $8 cheaper so the yield is greater. Am I missing something here?” I knew that it was I who had missed something.
I’m very thankful for how quickly you can get brought up to speed with the internet. A few keystrokes in the search box and I’d learned enough to semi-intelligently reply, “I'm not very familiar with BBL to be quite honest with you. From what I've read BHP seems to be preferred by investors as it is more liquid. I'm going to do some digging when I get the chance and write up my findings. As for the trade I recommended, we'd be getting BHP a lot cheaper thanks to the puts anyway so it would work out great if we got shares and if not it's decent income.”
While I’m not worried about adding the Australian-listed Limited shares to the portfolio, should other investors be better served by the UK-listed PLC shares?
BHP Billiton, according to the FAQ on their website, had this to say about the dual listing: “BHP Billiton was formed in June 2001 from the merger of BHP Limited (an Australian-listed company) and Billiton Plc (a UK-listed company). The merger was effected by way of a dual listed companies (DLC) structure, meaning that although the companies technically continue to be separate legal entities (now renamed BHP Billiton Limited and BHP Billiton Plc) with separate share listings and share registers, they are managed and run as a single economic entity. The companies have a common Board of Directors and management team. Shareholders in BHP Billiton Limited and BHP Billiton Plc have equal economic and voting rights, as if they held shares in a single company.” If everything is equal, why then the pricing disconnect?
I see three key differentiators: Liquidity, options availability and currency. BHP Billiton Limited has average daily liquidity of 3.3 million shares trading hands daily compared to the PLC shares having about two-thirds less liquidity at just 1.18 million shares trading each day. Both have the same number of shares outstanding at 2.6 billion and both pay the same annual dividend on those shares. Investors seem to be willing to pay a premium for access to liquidity. Unsurprisingly, there is also much less liquidity in the Plc options. For options expiring in August, there has been no volume to the PLC shares, whereas, the options volume on the limited shares are fairly active for that month. If you’re following the “No Drip, No Mess” Portfolio the options volume is key as we use them a lot. So, while liquidity would produce some premium, is it worth the 15% more you have to pay for the limited shares?
The final and likely more important differentiator is found in the base currency of the country where each listing is domiciled. If you believe that the US dollar will lose more value to the Aussie Dollar than the British Pound, you’d place more of a premium on Australian-based assets. For example, right now the US dollar and the Aussie Dollar are trading at a one-to-on ratio while the British Pound is just at $0.64 for each dollar. Due to its proximity to the growth of China, their natural resource base and faster GDP growth, investors see the currency gaining in value; therefore they are pricing that premium into the shares. Investors seem to be banking on value being created by the currency and until this perception changes, it’s unlikely the premium will ever be eliminated.
Having a dual share class can be confusing to investors and you need to know what you are investing in and make sure you are investing in correct listing. Berkshire Hathaway -- (NYSE: BRK-B) or (NYSE: BRK-A) -- has two classes of shares but while investors will have to pony up $122,588 more for the A shares, they are not buying something any more valuable than the B shares. Google (NASDAQ: GOOG) on the other hand is about to issue C shares in the form of a stock split to shareholders but these shares will come without any voting power. This lack of voting power should make shares trade cheaper than their A share brethren. When considering companies with dual listing or dual classes, make sure you know what you are buying. The market usually is efficient enough to re-price any real arbitrage opportunities.
latimerburned owns shares of BHP Billiton Limited (ADR) and has a diagonal call on Berkshire Hathaway . The Motley Fool owns shares of Berkshire Hathaway and Google. Motley Fool newsletter services recommend Berkshire Hathaway and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.