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Investors Just Got Another Reason to Buy This Growth Stock

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Do you own FirstService (TSX:FSV)(NASDAQ:FSV) stock?

If you do, you ought to be pretty happy about its performance in 2019. Up 24% year to date including dividends and 31% on an annualized basis over the past three years, it’s been a star performer on the TSX.

Recently, and quietly, FirstService did away with its dual-class share structure that kept founder and long-time CEO Jay Hennick comfortably in control.

A lot of institutional investors don’t like dual-class share structures because they keep an individual in control of a company, despite the fact they might not have more than a 50% economic interest. Detractors prefer a one share, one vote type of structure.

I’ve never had a problem with a dual-class share structure as long as it’s in place for the right reasons. Founder-led companies generally fall under this category. Family businesses also tend to favour this kind of share structure.

For every example of a dual-class share structure that doesn’t work, like Bombardier and the founding Bombardier/Beaudoin families, there’s one that does, like Brookfield Asset Management and hardworking asset manager Bruce Flatt.

The point is that dual-class share structures fail because the people running them aren’t good stewards of capital, not because the structure itself causes terrible things to happen.

If you take a quality CEO like the late Sergio Marchionne and put him in charge of a company with a dual-class share structure, he’s going to make it work. Put an incompetent CEO in charge, and it’s going to fail.

It’s quite simple.

End of an era

On March 12, FirstService announced that it had reached an agreement with Hennick that eliminates the company’s dual-class share structure and its cumbersome Management Services Agreement (MSA), which was put in place in 2004 between the company and Hennick. It was meant to incentivize Hennick to grow the company for the long term without paying out vast amounts of stock options.

FirstService got a motivated CEO and Hennick gained control.

In the 14 years since, FirstService’s market cap has increased by more than $3 billion for an annualized return of over 24%.   

In 2015, FirstService and Colliers International were split into two separate companies with Hennick running Colliers, one of the world’s biggest commercial real estate brokers, and Scott Patterson, the COO at the time, taking the reins of FirstService, which specializes in property management and property services across North America.

At the time of the split, Hennick agreed to work on a possible deal that would end the dual-class share structure. The board of directors finally dealt with the elephant in the room in February, hence the March 12th announcement.

As part of the agreement, Hennick’s converted his multiple voting shares into subordinate voting shares that come with one vote per share, eliminating the need for a dual-class share structure.

In addition, Hennick will remain non-executive chairman of the company and will be paid US$62.9 million and receive 2.9 million subordinate voting shares. Upon closing, Hennick will own 14.6% of the company but will no longer control FirstService.

It’s a win/win deal.

Why is this important?

T. Rowe Price Associates own 17.6% of FirstService’s subordinate voting shares. Once the deal goes through, it will be the company’s largest shareholder.

Although FirstService’s stock’s done well since the split in June 2015, it probably could have done, even better if it didn’t have the dual-class share structure.

That’s because certain institutional investors, as part of their corporate governance, are unable to invest in companies with dual-class share structures. Now that this obstacle has been lifted, you will begin to see all sorts of new institutions getting on board the FirstService train.

I’ve been keen about FirstService stock since mid-2016. I’ve recommended it many times since.

While I didn’t have a problem with the dual-class share structure, many do. Given Hennick is no longer involved on a day-to-day basis with FirstService, the agreement to eliminate the multiple voting shares makes total sense.

Expect FirstService stock to continue moving higher in 2019 and beyond.

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Fool contributor Will Ashworth has no position in any stocks mentioned. Colliers and FirstService are recommendations of Stock Advisor Canada.

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