A year ago, I was somewhat hesitant to recommend Accenture (NYSE:ACN) for Motley Fool Inside Value members, partly because I generally do not like companies with a dual-class share structure. For such a company to cut the mustard, it must have other outstanding features, or you have to believe that those in control of the voting shares will act in the interests of all shareholders.
Dual-class shares
Dual-class shares are usually common shares with different voting rights. A good example is Discovery Holding (NASDAQ:DISCa) (NASDAQ:DISCb), which has Class A common shares with one vote for each share and Class B common shares with 10 votes per share. In other words, the 12.1 million B shares have 121 million votes, compared with a single vote for each of the 268.1 million A shares. Fortunately, Discovery Holding has some very attractive franchises to help me look past its dual-class share structure.
Some companies issue common shares with no voting rights at all. Dual-class shares are prevalent in some family-controlled and previously private companies. On the plus side of the ledger, a controlling interest makes such companies less susceptible to Wall Street's whims. Even Warren Buffett's Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) has dual-class shares. Berkshire's B shares represent 1/30 of the economic interest in the company but only 1/200 of the voting rights. But with Warren in charge, I think I can trust management to do the right thing here!
Accent on Accenture
As I looked further at Accenture, I found that the dual-class share structure was not really an impediment, and so in July 2005 I recommended the shares to Inside Value members. Accenture's dual-class share structure arose from its 2001 initial public offering. Before that, as Andersen Consulting, it was a partnership. The two classes of shares consist of those available to you and me and those restricted to founders and original partners. Founders' shares were restricted so that the partners could not sell them on the open market or vote their shares as individuals. Importantly, the two classes of shares have the same economic and voting rights, except that the founders' shares are voted as a block by senior management.
Accenture has been buying shares back by the boatload and increasing shareholder value in the process. It's been doing so the old-fashioned, value investing way -- by buying shares below intrinsic value. Back in July, I valued Accenture shares at $32, and in the past 18 months the company has bought back around 130.5 million shares at an average cost of $24.
|
2005 |
Q1 2006 |
Q2 2006 |
Total | |
|---|---|---|---|---|
|
Shares Repurchased |
65.8 million |
52.2 million |
12.5 million |
130.5 million |
|
Cost Per Share |
$24.32 |
$22.00 |
$30.72 |
$24.02 |
|
Total Cost |
$1.6 billion |
$1.15 billion |
$384 million |
$3.13 billion |
Put another way, $3.13 billion of shareholder cash was used to buy 130.5 million shares that I valued at $4.17 billion, thus creating an additional $1 billion in value for shareholders. (Shares today are trading at around $30).
Here's a new one -- insiders giving value to outside shareholders! In the first quarter of 2006, a full 46.4 million of the total 52.2 million shares repurchased were from insiders at a 5% discount to market value, equating to roughly $1.63 per share, or $75 million. I also like that around 75% of shares repurchased in the past 18 months were from insiders, thus decreasing the influence of the block of insider shareholders.
Employee stock programs
Although share repurchases and shares issued for employee stock programs are two separate issues, some investors will inevitably link the two. In Accenture's case, although it repurchased 130.5 million shares, the shares outstanding (including founders' shares) have been reduced by only 107 million. Some 21 million shares of the difference are due to shares issued for various employee stock programs. Of this total, roughly 9 million covers stock option grants exercised, 9 million covers employee stock purchase plans, and 3 million goes toward restricted stock grants. The company receives cash for the options exercised and the stock purchase program, but of course, this is below the cost to repurchase shares.
The Foolish bottom line
As long as the shares remain undervalued, I'm all for Accenture to continue buying back shares, because it provides an excellent return to all shareholders. In addition, the company should continue to buy restricted shares from insiders to increase the outside float percentage and thereby reduce the voting influence that insiders hold.
Accenture and Discovery Holding are recommendations in Philip's Motley Fool Inside Value newsletter service. Be his guest at Inside Value for one month -- with full privileges, at no cost, to intrinsic-value estimates, CEO interviews, and buy reports..
Philip Durell owns shares in Berkshire Hathaway. The Motley Fool has a disclosure policy.
