Berkshire Hathaway Class A stock is selling at a discount. Consider It over B shares.
Thinking of buying Berkshire Hathaway stock?
If you have the money, consider the company's Class A shares, which now trade at a tiny discount to the more liquid Class B shares. That's CEO Warren Buffett's advice to potential investors.
Berkshire has had two classes of stock for nearly 30 years—the original high-price A shares and the newer Class B stock that are worth 1/1,500 of a Class A share.
The Class A stock closed on Tuesday at $740,085, up 1%, while the Class B stock ended at $493.48, up 1.2%. The Class A stock closed at an equivalent price of $493.39, slightly below the B shares. Both the A and B shares are up about 9% this year, five percentage points better than the S&P 500 index.
Buffett conceived of the structure for the two classes. The Class B shares are equivalent economically but have roughly one-seventh the vote of the A shares. Importantly, each A share can be converted to 1,500 B shares, but not vice versa.
The B shares now represent a majority of the float in Berkshire stock and are the Berkshire shares represented in the S&P 500.
The A shares can—and have—traded at a premium of as much as 3% in recent years, but they shouldn't trade for more than a trivial discount. If the discount gets too large, there would be incentive for investors to buy the A shares and convert them to earn an arbitrage spread. When there is a very small premium for the B shares, it may not be economic to buy the As, convert them, and sell the Bs due to frictional costs of trading, including bid/ask spreads.
Buffett wrote about the two classes of stock most recently in 2010.
'The Class B can never sell for anything more than a tiny fraction above 1/1,500th of the price of A. When it rises above 1/1,500th, arbitrage takes place in which someone—perhaps the NYSE specialist—buys the A and converts it into B. This pushes the prices back into a 1:1,500 ratio," he explained.
Here's his advice on buying the A versus the B shares:
'In my opinion, most of the time, the demand for the B will be such that it will trade at about 1/1,500th of the price of the A. However, from time to time, a different supply-demand situation will prevail and the B will sell at some discount. In my opinion, again, when the B is at a discount of more than say, 1%, it offers a better buy than the A. When the two are at parity, however, anyone wishing to buy 1,500 or more B should consider buying A instead."
One Berkshire investor told Barron's that he sold the B shares and bought an equivalent amount of A shares on Monday in a tax-advantaged account because of the parity of the two classes.
This year, Berkshire B shares consistently have traded close to parity with the A stock, and sometimes at a slight premium, based on closing prices. The last time the A shares commanded a 1% premium was in late February, and the A shares hit a 3% premium in April 2023.
Berkshire stock has been under pressure in recent weeks, falling about 8% from its early May peak as some of the 'Buffett premium" has bled out of the stock following Buffett's announcement at the Berkshire annual meeting on May 3 that he plans to step down as CEO at year-end.
Write to Andrew Bary at andrew.bary@barrons.com
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