- Volkswagen shares have enjoyed strong demand thanks largely to its electric vehicle surge and favourable comparisons with Tesla
- Preference shares are now trading at a 25 per cent discount to ordinary shares
Volkswagen has two share classes. That’s not unusual for a listed company, especially a German one where family owners have long liked to protect their voting rights by splitting shares into ordinary (voting) and preference (income-paying) classes. But it is unusual for there to be such a price difference between the two share classes of one company.
At the time of writing Volkswagen’s ordinary shares (VOW) are changing hands for €320. The preference shares (VOW3) trade at €239 - a 25 per cent discount. VOW is up 91 per cent in the year to date, VOW3 up 61 per cent.
There are a number of reasons for the surge in interest in the car giant in 2021. The launch of the ID.3 (the first of the company’s next generation of electric vehicles) and its bigger cousin the ID.4 (for the American market) has been far more successful than many imagined. In 2020, the group sold 70,000 units of the two models and overall EV unit sales increased three-fold.
In its domestic market, €9,000 government subsidies for each electric vehicle sold have helped to increase demand. That has been highlighted by German manufacturing figures for February and March, where car making factories have driven a better than expected post-covid recovery.
The company is also benefiting from strong demand in China where it recently increased its stake in its joint venture to 75 per cent. Volkswagen has said it will invest €15bn in Chinese electric vehicle infrastructure over the next four years and has now begun the manufacture of the ID.4 from its Tianjin site.
This EV uprising - a masterclass in public relations - has sparked favourable comparisons with Tesla, whose market capitalisation is currently four times the value of Volkswagen. In 2021, investors seeking to profit from the green motoring surge are increasingly looking to VW.
But the difference in the demand for the two classes of share is likely down to the discussions on the Reddit message boards. Investors who follow the channel WallStreetBets have been tempted by VOW and the pace with which they have ploughed into the shares has been unmatched by the demand for the preference shares. New investors are now buying VOW on 12.1 times next year’s forecast earnings and VOW3 on 9.3 times - an extraordinary difference for a stake in exactly the same company.
And there is another reason why investors should be wary of the difference between the VOW and VOW3 share classes: the former have just a 10 per cent free float and are therefore highly illiquid. Owning VOW for its voting rights is also hardly worth it as Porsche’s former holding company (which also trades on the German stock market under the ticker PAH3) owns 53 per cent of these shares.
The history of how Porsche came to be both Volkwagen’s largest investor and one of its leading brands is hugely complicated. Investors with a penchant for market history should read FT Alphaville’s fascinating retelling of the story here, but for those who are now unsure what to do with their VW shares, there are a number of options.
VOW investors should add to their holdings with VOW3, which will allow them to benefit when the disparity between the two share classes closes. New investors seeking to benefit from Volkswagen’s EV surge should pick the VOW3 classes - these may not be voting but they do pay a dividend. And those looking for a bargain might take a punt with PAH3 - Porsche shares currently trade on €92, a 71 per cent discount to the VOW shares of which it owns more than half.
And there is one final consideration - capital structure arbitrage. Investors have long sought to exploit the difference between two securities which have a relationship to each other by going long the lower rated shares and short the higher rated ones. Ironically this market quirk was a major factor in the complicated history of Porsche’s ownership of VOW and seems to have been the reason for Redditor’s interest in the stock (the VW history lesson is useful for investors involved in a short squeeze). Volkswagen investors should be wary of PAH3 investors going short VOW - the disparity in the two securities is bigger than it has ever been and only 10 per cent of the shares are free for retail investor ownership. Michael Burry - of Big Short fame - revealed in a hastily deleted tweet that he has a stake in PAH3. He’s already expressed his nervousness about overly-hyped EV makers. He would be right to query the VOW share surge in 2021.
