When you own enough of a company's stock, you get a voice in how that company is run. This is the basic logic behind shareholder activism, a long-standing Wall Street pillar. That said, sometimes the big shareholders don't exactly advertise their investment and the influence they wield. So you need to consider who owns stocks along with you and, importantly, their big-picture motivations. A comparison of Hormel(NYSE: HRL) and ENI(NYSE: E) will be highly illustrative.
The Hormel Foundation
Hormel is a major food maker with a focus on protein. It owns brands you probably know and use, such as SPAM, Planters, Skippy, and many others, along with its own namesake brand. It has a long history of success behind it, highlighted by an over 50-year streak of annual dividend increases, making it a highly elite Dividend King. You don't reach an achievement like that by accident.
Image source: Getty Images.
Some of the business success here is clearly derived from the company's approach, which has historically been slow, steady, and conservative. But there's another little factor that is pretty important to note. The Hormel Foundation owns 48% of the company. This foundation was set up by the company's founders to support local charities -- and to ensure Hormel remained an independent company, given that the foundation would have to approve any acquisition.
The key here for investors, however, is that The Hormel Foundation uses the dividends it receives to support its charitable efforts. That means it is pretty much fully aligned with long-term shareholders. That last thing the foundation wants to see is Hormel doing something that would jeopardize its dividend and its dividend growth.
The Italian government
So Hormel, shareholders, and The Hormel Foundation are in close to perfect harmony. Italian energy giant ENI also has a major shareholder, but its motives aren't as clear-cut. In this case, the Italian government effectively owns just over 30% of ENI, giving it a huge voice in the company's decisions.
The differences here couldn't be more stark. While The Hormel Foundation specifically wants Hormel to continue throwing off a healthy and reliable stream of dividends, the Italian government's goals are inherently political. It could push the energy company to invest in businesses that don't have anything to do with its core oil operations or make it remain in businesses that are losing money. Both directions here might result in jobs for Italian residents (which might help politicians stay in office) and a cash drain for ENI shareholders.
Moreover, government leaders change over time, often abruptly, thanks to elections. That means that ENI could have an imperative one day that switches the next simply because a new political party holds the reins of power. To be fair, there's no reason to think the Italian government will run roughshod over ENI, but given the government's massive ownership stake investors would be making a mistake to not at least consider the possibility of that happening. The goals of investors, ENI, and the Italian government are not exactly the same.
Conflicts of interest
To be fair, Blackstone(NYSE: BX) is one of the largest shareholders in many companies, and it has a pointed ESG agenda. Although this is just one more example, it highlights how hard it is to avoid owning companies that have some outside influence that may run counter to your thinking. However, in a few cases, that outside influence is huge and worth careful consideration. Hormel's relationship with The Hormel Foundation is an example where there is likely to be a broad alignment, to the point where you see it as a positive reason to own the stock. ENI and the Italian government is an example where conflicts could easily arise, and it might be a reason to avoid the integrated energy giant. Companies have to disclose their largest shareholders at least once a year in their proxy statements. It's worth taking a look at this information, just in case you have an ENI-like situation in your portfolio and don't know it.
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Reuben Gregg Brewer has positions in Hormel Foods. The Motley Fool has positions in and recommends The Blackstone Group Inc. The Motley Fool has a disclosure policy.
