Barron's Streetwise - Supervoting Shares and Bond Barbells

Episode Date: April 12, 2024

In this non-episode, Jack and Jackson touch on dual-class stocks, the Paramount deal, fixed income, and cabbage. Learn more about your ad choices. Visit megaphone.fm/adchoices

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So there's no episode this week. We're just going to do- On vacation. Well, we never use the V word. We never, we've got to make it seem like I'm, like I never stop working around the clock. I'm always working. So this is not, you know, I'm away. And so this is going to be not an episode.

This is a non-episode. Okay. So, you know, breathe deeply, reset your expectations lower. And I'll say a few things. And some of those things are going to be about dual class stock structures. And maybe a couple of those things are going to be about bonds. By the way, this is the Barron Streetwise podcast. And listening in is our audio producer, Jackson. Hi, Jackson. Hi, Jack. I want to talk very briefly about two subjects.

One of them is super voting shares. And then we'll say a few words about bonds. Super voting shares. Has everyone seen when you look at a stock and it has different classes? There's the class A, here's the class B, there's a class C. Which one should I get a quote on? Which one are we talking about here? It's a little confusing sometimes. And the reason that exists is why, Jackson? Yeah, it seems like they're there. So founders can take their companies public and make a lot of money without giving up control of their companies. I guess that's what, yeah, there's a couple of, yeah, I guess that's fair to say. There's a couple of different reasons that are given for having this structure. I should point out, this is very common in media companies. It's increasingly

common in technology companies. And I work for a company that has this type of structure. And two reasons that I hear given across all kinds of companies are one, this company is in a special kind of business where we wouldn't want to have it exposed to the whims of the stock market and capitalism and so forth. There's something here that goes on that is a special public good, and we want to protect that. That's common in the media business, including in the journalism business. And you can decide for yourself how you feel about that argument. And the other argument I hear is this is a business with a visionary founder. And look what this special person has done.

This person is better able than anyone else to create economic value over time. And we must protect this person's role in this company. And therefore, we wouldn't want to have this company subject to whatever, takeovers or anything, any surprises that could move this person out of a control position. And there are all different ways that this is done. You might have, for example, a class A stock where each share gets you one vote and then a class B class of shares where each share gets you 10 votes. So those are super voting shares

and ownership of those shares is closely controlled. You might have a class where you have no votes, but whatever the structure, super voting shares are a way to separate your economic stake from your voting control. This reminds me of when Nickelodeon had all the kids vote for the 2008 presidential election. And what happened? Millions of kids around the country went to the polls and made their voice heard. I would say made their voice not heard at all, right? Because they're kids.

I don't think anything happened with that. Yeah. Millions of millions of kids made their voices not heard. Those are the non-voting shares, basically. So I mentioned all this for a couple of reasons. One, we have talked maybe too much about Disney and that proxy battle that they had. Nelson Peltz and his try-in partners trying to win two board seats. That effort failed.

That vote occurred and the shareholders voted with Disney. But I just want to point out that that's a fairly unique situation that that even occurred because most big media companies, you don't have something like that. You don't have the possibility of a vote that goes against the interests of the people who control the super voting shares, because most of them are structured as dual class stocks, Comcast and Paramount and others. But for Disney, that's not the case. So Disney, you can get this kind of battle.

In the end, I think you could argue when you look at Nelson Peltz's complaints about Disney and the things that he wanted to do, you can make the argument that some of his complaints were pretty fair, right? There's been some sloppiness in the company's succession, and the company has arguably spent too much money. When Disney suddenly said, hey, we're going to save $7.5 billion a year, try and ask the question, how do you even come up with that much money that you could save? You must have been wasting a lot of money. I think that's fair. They also said that Disney hadn't really detailed a clear digital plan for ESPN. Okay. But as a result of that battle, Disney began to make changes and to speed up the pace of change. It really focused on savings. It did fill investors in on a digital plan for ESPN. Remember, they're going to combine with some other media companies and have a special

skinny sports bundle. And they're also going to roll out a true streaming alternative for ESPN. And Disney said that it has taken steps to improve its succession plan, its search for its next CEO. And meanwhile, it's saving money. And the stock is up a lot. And Triumph Partners can say, hey, that's because of us. That's because we showed up. Disney says, no, that stock is going up because of us, because we're getting better results. But meanwhile, the shareholders who had been hit by this big decline in the stock, at least they've got a better price now.

So it's working out well for ordinary shareholders. And that, I think, wouldn't have been quite as possible in the same way with super voting shares. I want to contrast that with what's going on at Paramount. You know, Paramount, we've had its CEO, Bob Backish, on this podcast. CBS, the longtime leader in traditional television ratings, and Viacom, a cable company with an audience that's skewed younger with channels like MTV and Comedy Central and Jackson's favorite Nickelodeon. Those two companies merged, and that included, by the way, the Paramount Film Studios. So they called the business Paramount, and that's where you get today that Paramount streaming service. And the stock has stunk because investors have really cooled on streaming. They don't want to

see endless amounts of cash being deployed into streaming businesses that aren't that profitable. They're worried about the sudden acceleration in cable cancellations and what that's going to mean for the cash flow of these companies. Okay, so Paramount's market value is deeply depressed, and it has attracted suitors. It has attracted companies that want to do a deal, buy some of its stuff. Some or all of its stuff. One of those companies is called Skydance Media.

It's a Hollywood investment slash production operation run by a guy named David Ellison, who is best known for, well, being a guy named David Ellison, who is best known for, well, being the son of Larry Ellison, who's the founder of Oracle and a multi-skajillionaire. Reports emerged back in December of interest from Skydance in Paramount, and the stock since then has lost about a third of its market value. Why would that happen? Normally, if there's takeover interest in a company, its shares go up because you think, okay, in order to get a deal done, the buyer is going to have to offer a

premium to the current stock market value. That's not happening here. The reason Paramount investors don't seem too jazzed about a potential deal with Skydance comes down to a woman named Sherry Redstone. She is the daughter of the late media mogul Sumner Redstone, and she has more or less total control over what happens with Paramount. Her family owns this company called National Amusements, and National Amusements has about 77% of the voting shares in Paramount. It has less than 10% of an economic stake in the company. So you can see just how wide this chasm can grow between your voting stake and your economic stake. And our friends at the Wall Street Journal have reported that one of the deal structures being discussed involves a $2

billion payout for the Redstone family. That's step one. The next step involves shareholders of Paramount ending up getting shares in a combined Paramount slash Skydance. So basically the Redstone family would get cash, regular shareholders would get their stake diluted in shares of a new something. And they might not like the idea. They might want to vote against it. But again, they can't because Sherry Redstone has voting control. There was another all cash offer from a private equity company called Apollo. But Paramount has reportedly put that offer to the side while it gives Skydance a 30 day period to exclusively consider its deal.

I think the risk here for Paramount shareholders is clear. The clock is ticking. The legacy television business is not growing any more attractive. There are deals on the table now, and you want to get something done, I would think, in the near term. But there's a chance that ordinary shareholders will be stuck with a deal they don't like. I'll tell you just a few more things about dual class structures in general. There are all kinds of companies that have them. Alphabet, for example, and Meta Platforms,

the owner of Facebook and Instagram. And you can look at those and you can say, well, they've been very successful over time. Maybe this thing works out pretty well for shareholders. But then you can also look at an example of WeWork, a company that went bankrupt. Or you can look at an example that a company that's doing fine, take CalMain Foods. They're in the business of eggs, you know, omelets, right? They're part of Big Egg.

They're part of Big Egg. I think they are Big Egg. And then you sort of ask yourself, who is the visionary at the egg company that we're protecting here? I mean, I don't know. There are plenty of big tech companies that do just fine with only one class of share, Microsoft, Apple, Amazon. But dual classism is on the rise.

It used to be a small percentage of companies that had this structure. By 2019, we were up to 9% of companies in the Russell 3000 that used multi-share classes. And the number is rising because over the following three years, 40% of tech companies that went public adopted more than one share, and 20% of non-tech companies. There's an advocacy group called the Investor Coalition for Equal Votes. And they say that dual classism is on the rise because there's been a power shift in favor of company founders relative to those early stage venture capitalists who want to invest in those businesses and the venues that want to attract their initial public offerings once they do go public. So they're basically willing to make all kinds of concessions to win these investment opportunities or this IPO business.

And one of those is they say, yeah, go ahead, have a dual class share structure. The risk, obviously, of this type of share structure is that if you do have underperforming managers, you can leave them entrenched. It can be hard to get rid of them. But I guess it all begs the question of what's the bottom line effect? What does it mean for performance for investors? There was a recent report by the CII Research and Education Fund that's affiliated with something called the Council of Institutional Investors. And it looked at the period from 2018 to 2023, and it looked at companies that had both perpetual dual class structures and also companies that keep the entire board from coming up for a vote at the same time.

That's another control tactic. You allow only a few board seats to come for a vote at the same time. That's another control tactic. You allow only a few board seats to come up for voting at the same time. And returns for that group of companies fell short of broad stock market indexes. That's one study. There have been others. In general, what they have shown is that there does seem to be benefits early on in a company's life as a publicly traded company to having a dual share class. But those benefits evaporate and then begin to reverse

after somewhere in the six to 10 year neighborhood after companies have gone public. So investors who oppose these types of share structures, including a lot of institutional investors, they've called for provisions that would automatically convert dual-class shares to a single class after either a certain number of years after a company goes public or after the economic stakes of the founders drop below a certain level. That last one would prevent the kind of situation you have with the Redstone family where their economic stake in Paramount is relatively small, but their voting stake is humongous. And that is dual-class shares, multi-class shares, class A, class B. That's where it comes from and what it all means.

Jackson, you've dug a little deeper into kids picking the president on Nickelodeon and you found? Jackson, you dug a little deeper into kids picking the president on Nickelodeon and you found? Yeah. So since 1988, the kids have correctly picked the eventual president of the United States in all but two elections. Give me that in a sports record. They are? Yeah, they're seven and two. Seven and two.

Not bad. Have they voted this year? They have not voted yet. They do this kid election in October. Are there debates? Apparently the presidents used to come and make appearances. On Nickelodeon? Yeah, fizzled out in 2008. Did they drop the green slime on the presidential candidates at any point? Probably not, right?

Yeah, I think maybe that hurt ratings. People were expecting the slime. All right, well, kids, vote your conscience. If you're Nickelodeon fans, if kids are still watching Nickelodeon, remember, we've got absolutely nothing riding on this. But I like to hear about the civic participation. but I like to hear about the civic participation. Let's take a quick break in this totally not an episode, and then we'll say just a few words about bonds. Welcome back, Jackson. I understand we have a listener question. We do. We hear it's Bob from Bellingham, Jackson. I understand we have a listener question.

We do. Here's Bob from Bellingham, Washington. Do they say Bellingham or do they say Bellingham? Belling, I think Beham. Bob from Beham. Let's hear it. My wife and I really enjoy your podcast and appreciate all the financial and cultural insights that both you and Jackson share with the listeners.

My question relates to bonds and ETFs. You have had several guests in the past who have recommended a barbell approach to bonds. Can this approach be accomplished with ETFs as opposed with owning individual bonds? And what would be the pros and cons to each? Also, would you agree that this is a good strategy to adopt under the current interest rate environment? My interest is in generating income with some appreciation through my holding of bonds. Thank you very much. Bob, great to hear from you. And thank you for the excellent question. And thank you for calling out our cultural insights. We work hard on those on the show. Jackson,

earlier in this non-episode, told you some things about Nickelodeon. Jackson, any other cultural insights you want to share? I've got one. I've got one if you're stumped. Yeah, yeah. Which one for me? Well, it's just a, let's call it a big newspaper here in the New York area that says that the coolest menu item at the moment is cabbage. That sounds terrible. That was from March. And at the time that I'm recording this, it's April. So I don't know if cabbage is still cool, but you know, do with that what you will. But Bob, you didn't ask me about cabbage. You asked about bonds and bond ETFs and a barbell strategy. The typical meaning of a barbell is this. You're someone who buys individual bonds and you know that you can ladder those bonds. In other words, you can have a one-year bond,

a two-year, three-year, and so on. So you have money coming due each year that you can reinvest. But maybe instead of doing that, you just want to have a short bond and a long bond. For example, maybe you want to have a one-year bond and a 10-year bond. Recently, a one-year bond yielded 5.2%, and a 10-year was a little over 4 and a half. That's called an inverted yield curve. When the long stuff pays less than the short stuff, you might look at that and say, okay, I want to get that higher yield on the one-year bond. I'll take the risk that by the time that comes due and I have to reinvest that bond yields aren't as high and I have to reinvest that at something lower. But meanwhile, I'm going to lock in that somewhat lower yield on

the 10-year bond. And that way, if yields really go down over the next couple of years, at least I'm locked in on something for longer. So that's a simple way to diversify individual bond holdings. And diversification is an issue for most people if you're buying individual bonds. I think you need a million dollars plus to properly diversify a portfolio of individual bonds, to buy a mix-up, bonds of different risks and maturities and so on. That's one of the reasons people would buy a bond mutual fund or a bond exchange traded fund

to begin with. They want the diversification of a big portfolio while putting a smaller dollar amount to work. And there's definitely a trade-off here in terms of not having a maturity date for your bonds, but I don't think that that's such a deal breaker. We've gotten some other questions about that, so I'll lump that in here. Basically, if you have a bond fund and if interest rates shoot higher, you can expect the value of your bond fund to decline.

Assuming these are safe bonds and a whole range of maturities, including short ones, I wouldn't expect a plummet like a stock market crash or anything like that, but you might see the value of your shares fall. And you might think to yourself, well, that's not what I'm in bonds for. I'm in bonds for protection. I want to know that at a certain date in the future, I'm going to get my money back, all of it, right? And it's true that you do get that with individual bonds and not bond funds, but there's something that you get with bond funds and not individual bonds. If interest rates do indeed shoot higher, then a bond fund has cash that's constantly becoming available because they have this big diverse portfolio of bonds and some of the bonds are coming due all the time. So they can put cash to work at the higher rates during that whole time.

If you just own a single 10-year bond and you're holding it to maturity, yes, you're going to get your money back. But if rates were to shoot higher, you'd be stuck with this lower-paying bond. You'd miss out on extra income over that time. Remember, we had Kathy Jones, who's the bond strategist from Schwab, on the show, and they said that over at Schwab, they have studied the matter. They've studied the difference between a portfolio of individual bonds and bond funds, and they've found that they're about the same over time in terms of the returns that they produce. I also want to call out a report I received this past week from UBS. This is from Salita Marcelli.

She's a Global Wealth Management Chief Investment Officer, Americas. We've had her on the podcast before. And the title of this note is, Quality Bonds Remain Attractive Amid Rising Yields. And the thrust of it is that treasury yields have gone up since November. Traders have scaled back their expectations about how much the Federal Reserve will cut rates or when it might cut rates. So this is another opportunity to buy bonds at higher yields. Those rising yields are evidence of continued strength in the economy here in the U.S., a rebound in manufacturing, strong job creation.

The flip side of that is that inflation has been higher than expected. has been higher than expected. So Salida at UBS writes that the yields are likely to remain volatile in the near term as markets shift views on the Fed's path. She writes, we continue to see an attractive risk reward outlook for quality bonds, including government and investment grade corporate bonds for three reasons. Those three reasons are, number one, yields offer an appealing source of portfolio income. Number two, yields are expected to fall this year. That's their base case. We'll see whether that plays out. And number three, quality bonds offer potential diversification benefits.

By the way, Bob, you said that your goals with your bond portfolio were, I believe, income and appreciation. My advice on that part specifically would be change your goals. I would change them to using bonds for safety and income. Appreciation, that's the job of the stocks in your portfolio. Your best guess on a portfolio of bonds of what your future returns are going to be is your current yield. If you've got a portfolio of bonds yielding 4% now, and you ask me, what do you think that'll return over the next 10 years? I'd say 4% a year. Could be higher or lower, but that I think is the assumption that you want to make as an investor. Okay, now to your

specific question about a barbell approach using ETFs. I don't think you need a barbell approach with funds. If you have a broad market bond fund, I think you already have diversification, and then you're trying to diversify with your diversification. I think it's overkill. I think it's like a stand-up comic wearing a Hawaiian shirt. You're already up there, presumably, to say funny things. Just say funny things. You don't need to be whimsical with your shirt. At least 3% of our listeners are wearing Hawaiian shirts. There's a guy right now tearing that Hawaiian shirt off his chest and realizing this is where he's gone wrong for the past seven years.

I got to say, as the cultural steward of the podcast hawaiian shirts are coming back in where was i yeah barbells there was something from black rock where they said uh you know use a barbell barbell your bonds to help evolve fixed income portfolios and they were talking about bond dts but their idea was, you know, you can use the term barbell to mean other stuff. I mean, have one of this thing over here and one of that thing over there. And they use it to mean have some bond ETFs on one end and then use alternative investments on the other end. I don't like that idea because I don't typically like whatever they mean by alternative investments. Usually it's high fee, complicated stuff that most people don't like that idea because I don't typically like whatever they mean by alternative investments.

Usually it's high fee, complicated stuff that most people don't need. But the idea of using a barbell approach for two different things, that's a maybe. That's got potential. One of the ways you could think about it, Bob, is you presumably want to have safe bonds in your portfolio. But if you did want to take on some more risk to seek out some higher yields, you might say, look, I want two ETFs and one of them is going to hold maybe a riskier mix of bonds, maybe corporate bonds with some high grade and some low grade bonds. But I'm going to

keep that portfolio very short, maybe a couple of years. And that's one end of the barbell. And on the other end of the barbell, I'm going to have safe bonds, treasuries, and very high-grade corporate bonds. And there, I'm willing to go out longer, seven years, nine years, what have you. What you're saying is, I want to leave less time for something to go wrong with the risky stuff by keeping that short. If that's appropriate for your financial circumstances, then fine. But again, I don't think there's anything wrong with just using one low-cost bond fund to diversify your bond portfolio. Jackson, what are the price on those things today?

What are the expenses that folks in the know are paying on their low-cost bond ETFs? Who's got them and what do they cost? Yeah, there's a number of funds here that have 0.04% expense ratios. They all tend to end up at exactly the same place because they all compete against each other for investor cash. 0.04%, that's cheap. And the names, what companies?

Vanguard, iShares, Spyder, Schwab. The usual suspects. Take your pick. The usual... Say that for me. The usual suspects is what Jack's trying tos. Take your pick. The Usuals. Say that for me. The Usual Suspects is what Jack's trying to say. There you go. Get out there.

And that's a great place to end. I want to thank Bob and Bob's wife from Washington for the question. And I want to thank Salita from UBS for the note. And thank all of you for listening. We'll be back next week with a non-non episode or an episode, as I like to call it. We'll see you then. I mean, we won't see you. We won't even hear you.

You'll hear us then. Hey, we can hear them if you tape on your phone, use the voice memo app. Yes. All right. Send your questions. Yeah. phone use the voice memo yes all right send your questions yeah send your questions to jack.how jack.how h-o-u-g-h at barons.com right we won't see you next week but jackson and i'll see each other while we record for you to listen to it later wherever you listen to i feel like we nailed

this one all right let's let's get out of here