Berkshire Hathaway Class A vs. Class B Shares: An Overview
Investors interested in buying into Warren Buffett's Berkshire Hathaway have two options: Class A stock (BRK.A) and Class B stock (BRK.B). The two types of shares each provide access to the famous conglomerate, but they have important differences.
The main difference between the two types of shares is their price. On July 17, 2023, the company's Class A shares closed at $523,500 pershare. Compare that to the more affordable Class B shares, which closed at $344.25 on the same day.
Key Takeaways
- Berkshire Hathaway Class A is the company's original stock offering, known for its stratospheric price per share.
- Berkshire Hathaway Class B shares, first issued in 1996, are more modestly priced and have a correspondingly modest share of equity value in the company.
- There can be minor differences between the two in market performance, but the key difference is that Class B is affordable to small investors.
Berkshire History and the Introduction of Class B Shares
Berkshire Hathaway was content with its highly valued, single class of stock. But the market demanded a lower-priced, more common-stock nibble at the Berkshire pie, given that shares were trading for around $30,000 at that time.
So in 1996, chief executive officer (CEO) Warren Buffett and the board responded by issuing 517,500 shares of Class B shares. This allowed anyone interested to invest in the company for 1/30th the price (and equity) of a Class A share of stock. A 50-to-1 stock split in 2010 sent the ratio to 1/1,500th, which means each share of a Class A common stock was convertible at any time to 1,500 shares of Class B common stock.
Class B shares carried correspondingly lower voting rights as well (of the voting rights of a Class A share 1/200th of the per-share voting rights. later changed to 1/10,000th) and Buffett marketed Class B shares as a long-term investment and as an open-ended offering, so as to prevent volatility as a result of supply concerns.
On May 1, 2021, vice chair Charlie Munger unofficially announced that Warren Buffett would be succeeded as CEO by Greg Abel when Buffett eventually steps down. Abel is CEO of Berkshire Hathaway Energy and vice chairman in charge of noninsurance operations.
Why 2 Share Classes?
The main reason why Class B shares were introduced was to allow investors to purchase the stock directly instead of buying a sliver of a share through unit trusts or mutual funds that mirror Berkshire Hathaway's holdings. After all, the majority of individual shareholders just can't afford the sky-high price of a single Class A share. As of July 20, 2023, the stock closed at $526,130.
Buffett explained the action in his 1996 annual letter to shareholders:
"As I have told you before, we made this sale [of Class B] in response to the threatened creation of unit trusts that would have marketed themselves as Berkshire look-alikes. In the process, they would have used our past, and definitely non-repeatable, record to entice naïve small investors and would have charged these innocents high fees and commissions."
If the stock was left in the hands of unit trusts, "Berkshire would have been burdened with both hundreds of thousands of unhappy, indirect owners (trust holders, that is) and a stained reputation."
Key Differences
Buffett insists that the Class A shares will never experience a stock split because he believes the high share price attracts like-minded investors, those focused on long-term profits rather than on short-term price fluctuations.
Along with being more accessible to retail investors, Class B shares offer the benefit of flexibility. If an investor owns just one share of Class A and is in need of some cash, the only option is to sell that single share, even if its price far exceeds the amount of money they need to access.
In contrast, a holder of Class B shares can liquidate part of their Berkshire Hathaway holdings just up to the amount needed to meet cash flow requirements. Class B also provides apotential tax benefit: The much lower price means that Class B stock can be passed to heirs without triggering the gift tax the way passing Class A shares does.
One final difference is that Class A shares can be converted into an equivalent amount of Class B shares any time a Class A shareholder wishes to do so. The conversion privilege does not exist in reverse. Class B shareholders can only convert their holdings to Class A by selling their Class B shares and then buying the equivalent in Class A.
Advantages and Disadvantages of Berkshire Hathaway Class A and Class B Shares
Given the astronomical price of Class A shares, most investors do not have much of an option of which type of share to buy if they're interested in Berkshire. For investors who are able to make a decision between investing in a smaller number of Class A shares or a much larger number of Class B shares, there are a few pros and cons of each to keep in mind.
Advantages
Class A shares historically tend to slightly outperform Class B shares, but this is by no means a guaranteed outcome in the future. Keep in mind that this may be due to different pools of investors and market dynamics.
Class A shares also offer the convenience of a long-term investment without much possibility of a stock split down the line.
Investors looking for flexibility or without a great deal of money have the option to invest in Berkshire's Class B shares. As such, someone looking to adjust their stake in Berkshire in a more granular way will likely prefer the dramatically lower price of this stock. With an equivalent investment in Class B shares, an investor has the opportunity to sell off a portion of their holdings in order to generate an artificial dividend or to better balance a portfolio.
Disadvantages
One of the most obvious drawbacks to investing in the company is the price of the Class A share. There really is no way for the average investor to purchase even a single share in the company. Even investing in a mutual fund or exchange-traded fund (ETF) that has Class A shares in its portfolio won't guarantee that you get the equivalent of a single share of this stock.
Because there is more flexibility in Class B shares than Class A shares of Berkshire Hathaway, investors may expect a stock split in the future, thereby diluting their interests in the company.
Pros
Class A shares outperform Class B shares
Long-term investment option with Class A share
Class B shares offer greater flexibility
Cons
Costly Class A shares
Possible stock splits in Class B shares may dilute ownership
Why Doesn't Berkshire Hathaway Stock Split?
Warren Buffet has stated that he would never split the class-A shares of Berkshire Hathaway, even though they trade at almost $530,000 per share. His reasoning is that he wants to only attract long-term, high-quality buy-and-hold investors (like himself) and to discourage scalpers and day traders. Instead, the Class B shares trade at a more reasonable $345 per share.
Why Do Some Stocks Have 2 Classes (A & B Shares)?
Several companies offer more than one share class to the public. Class A shares will typically grant more voting rights than other classes. This difference is often only pertinent for shareholders who take an active role in the company. Nevertheless, because of the voting rights, A-shares are often more valuable than B shares. Some companies even have three or more share classes, in some special circ*mstances.
Can a Shareholder Convert Berkshire A Shares Into B Shares?
Each share of Class A Common Stock is convertible, at the option of the holder, into 1,500 shares of Class B Common Stock. Shares of Class B Common Stock are not convertible into shares of Class A Common Stock.
How Many Berkshire Hathaway Shares Are There?
There are 1.45 million Berkshire Hathaway Class A (BRK.A) shares outstanding. More than 2.17 billion Class B (BRK.B) shares were outstanding as of July 20, 2023.
The Bottom Line
As CEO, Warren Buffet has helped Berkshire Hathaway become one of the most valuable companies in the world. The company's Class A shares are among the world's most coveted stocks. That's because it comes with great value but also a hefty price tag, which makes it out of reach of the average investor. If you're looking for a way to reap the benefits of investing in the company, consider Berkshire's Class B shares. As with any other investment venture, make sure they align with your goals and investment philosophy.
