Berkshire Class A Stock Trades at Big Premium to B. What Buffett Says to Do.

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Berkshire Hathaway’s Class A shares now are trading at their widest premium to the company’s Class B stock in more than three years. 

The premium stood at 3.4% on Friday’s close, compared with 1% as recently as April 5. The average over the past three years has been between zero and 1%, with a few instances of 2%.

The Berkshire Hathaway (tickers:

BRK. A
,

BRK. B

) A shares finished Friday at $496,000, a new high for 2023, while the Class B stock ended at $319.74. The A shares were up 1.1% in Friday’s session while the Class B stock gained 0.5%

To calculate the 3.4% premium, Barron’s compared the price of the A shares to the value of 1,500 Class B shares. Each B share is economically equivalent to 1/1,500th of an A share.

Given the outsize premium on the A stock, investors partial to Berkshire may want to purchase the cheaper Class B shares. CEO Warren Buffett has suggested that investors buy the Class B stock when the A-share premium is more than 1%. He has advised buying the A shares when the two classes are at parity, as they were at the start of 2023.

It isn’t clear what has driven out the premium on the Class A shares. Berkshire stock has been on a roll in April, with the A shares up nearly 7%. It’s possible that Buffett’s widely covered trip to Japan last week has spurred buying by Asian investors, and that those buyers favored the A shares.

Berkshire Hathaway, like many other companies, has two classes of stock outstanding. The original stock is the Class A shares—Buffett holds virtually all his roughly 15% economic stake in Berkshire through the A shares. The Class B stock was issued in 1996 and now is more liquid and widely owned than the A stock due to its lower share price and inclusion in the

S&P 500

index.

Each A share can be converted into 1,500 Class B shares, but B shareholders can’t convert their stock into A shares. This means the B shares should never trade at a premium to the A shares because of potential arbitrage activity. There is no limit on the premium on the Class A stock.

The Class B shares also have a lower vote. Their economic stake is 1/1,500th of a Class A share but they carry just 1/10,000th of a vote. This disparity has enabled Buffett to maintain a 31% voting stake with just a 15% economic interest.

Here is what Buffett wrote about the A and B shares in a letter posted on Berkshire’s website that was last updated in 2010:

“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,” Buffett wrote.

Write to Andrew Bary at [email protected]