Morningstar - Q4 2023 - 7

invested capital and destroyed shareholder
capital. And even after Smucker offloaded the bulk
of these assets to Post POST in early 2023,
our analysts retained a no-moat rating, arguing
that any financial firepower gained from
the sale could be used for further value-destroying
acquisitions. Clearly, Smucker's Poor Capital
Allocation Rating has been well earned.
One universal takeaway: Like everything else
in investing, price matters. Just like investors need
to avoid overpaying for even the highest-quality
stocks, management teams need to avoid
letting the promise of spreadsheet-driven math
tantalize their taste buds.
Lessons From Dual Share Classes
One final cautionary point about management:
Not all dual share classes are created equally.
Publicly traded companies operate for the
benefit of their shareholders, and typically every
share of stock has an equal say in a firm's
direction. But occasionally-and lately with large
tech companies in particular-firms issue stock
with limited voting rights, so public shareholders
can capture the economic benefits of being
an owner but without the typical associated
voice. This is the reason that Mark Zuckerberg and
other insiders at Meta Platforms META control
more than 60% of the company's votes despite
holding just 14% of shares.
Normally, these insider shares are not publicly
traded, offering outside investors limited choice
on the matter. But in the few cases where multiple
classes of shares are available on the market,
each with different voting power, the relative
pricing of each may offer some important insight
into how investors view management.
For example, Canadian miner Teck Resources'
Class A and B shares trade at a similar
level; clearly, Class B investors aren't too fussed
about their shares holding a hundredth the
voting power of each Class A stock.
Compare this with aerospace parts supplier
Heico HEI, whose HEI shares hold 10 times the
voting power of HEI.A and trade at a 25%
premium. The market seems to be pricing in
some concern that minority shareholders'
limited influence could weigh on the company's
success. Depending on your view of management
quality and desire to vote in company
matters, owning nonvoting shares may be
acceptable, particularly if they're heavily
discounted. But be careful; sometimes you get
what you pay for. K
Adam Fleck is director of research, ratings, and ESG,
for Morningstar Research Services LLC. He is a member
of the editorial board of Morningstar magazine.
EXHIBIT 1
Moats and Management Quality Only 10 companies in Morningstar's equity
coverage are trading at 5 stars and have a wide moat and an Exemplary Capital
Allocation Rating.
Company
Adyen ADYEN:NL
Anheuser-Busch InBev BUD
JD.com 09618:HK
Roche ROG:CH
Morningstar
Rating
Economic
Moat Rating
QQQQQ Wide
QQQQQ Wide
Inner Mongolia Yili Industrial Group 600887:CN QQQQQ Wide
QQQQQ Wide
QQQQQ Wide
Taiwan Semiconductor Manufacturing TSM QQQQQ Wide
Tencent Holdings 00700:HK
Walt Disney DIS
U.S. Bank USB
Zimmer Biomet ZBH
Source: Morningstar. Data as of Sept. 5, 2023.
QQQQQ Wide
QQQQQ Wide
QQQQQ Wide
QQQQQ Wide
Capital Allocation
Rating
Exemplary
Exemplary
Exemplary
Exemplary
Exemplary
Exemplary
Exemplary
Exemplary
Exemplary
Exemplary
Sector
Technology
Consumer Defensive
Consumer Defensive
Consumer Cyclical
Healthcare
Technology
Communication Svcs
Communication Svcs
Financial Services
Healthcare
EXHIBIT 2
Moats Win Out Wide-moat stocks, even with Poor or Standard Capital Allocation
Ratings, have outperformed all others, including a combination of no-moat and
Exemplary ratings.
Median Annualized Total Return, Jan. 1, 2017-Aug. 18, 2023
12%
8
4
Wide + Poor
or Standard
Wide +
Exemplary
Source: Morningstar. Data as of Aug 18, 2023.
Narrow +
Poor or Standard
Narrow +
Exemplary
None + Poor
or Standard
None +
Exemplary
10.5
8.6
8.5
6.8
7.1
6.9
morningstar.com/products/magazine
7
Median Annualized TR
Morningstar - Q4 2023

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