What's the Difference Between Berkshire Hathaway's Class A and Class B Shares?

What's the Difference Between Berkshire Hathaway's Class A and Class B Shares?

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 Dec. 31, 2021, Berkshire Hathaway Class A closed at $454,400 per share, compared with $301 per share for the Class B stock. But there are other distinctions as well.

Berkshire History and the Introduction of Class B Shares

More than 20 years ago, Berkshire Hathaway was content with its highly valued, single class of stock. But the market was demanding 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, Warren Buffett, CEO of Berkshire Hathaway, and the board responded by issuing 517,500 shares of Class B shares, offering the ability to invest in the company for, initially, 1/30^th the price (and equity) of a Class A share of stock.

A 50-to-1 stock split in 2010 sent the ratio to 1/1,500^th. In other words, 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 1/200^th of the per-share voting rights. later changed to 1/10,000^th), 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.

Why 2 Share Classes?

The main reason for the introduction of Class B shares was to allow investors to be able 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.

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."

Differences Between A and B Shares

Unlike the Class B shares, which split in 2010 and could potentially split again, Buffett has declared 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 a potential tax benefit: Its much lower price means that BRK-B stock can be passed to heirs without triggering the gift tax, as 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.

A and B: Pros and Cons

Given that Class A shares of Berkshire are currently priced at nearly $500,000 each, most investors do not have much of an option of which type of share to buy if they're interested in Berkshire. For those investors 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.

When it comes to pure performance, there can be a difference between Class A and Class B shares, even though they both represent a stake in the same company. Market dynamics and differing pools of investors are likely to be the primary reason for this, but it is worthwhile to note that there could be performance decisions included in a comparison of the two types of shares. Historically, Class A shares have tended to slightly outperform Class B shares, but this is by no means a guaranteed outcome into the future.

The primary pros and cons for each type of share have to do with the differences illustrated above. Investors looking for flexibility or without a great deal of money to invest in Berkshire will opt for Class B shares; someone looking to adjust their stake in Berkshire in a more granular way will likely prefer the dramatically lower price point of Class B shares. 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.

On the other hand, Class A shares offer the convenience of a long-term investment without much possibility of a stock split down the line.