Buffett mulls over change to canny bet on Bank of America
Warren Buffett said on Saturday he plans to stick with the shrewd bet that his Berkshire Hathaway Inc made on Bank of America Corp, but might eventually swap the preferred stock that Berkshire owns into common stock.
Berkshire bought $ 5 billion of Bank of America preferred stock carrying a 6 percent dividend, or $ 300 million annually, in August 2011, when many investors worried about the second- largest US bank’s capital needs.
More importantly, Buffett also received warrants to buy 700 million Bank of America common shares at $ 7.14 each by September 2021.
Many analysts thought the terms agreed to by Buffett and Bank of America Chief Executive Brian Moynihan were generous to Berkshire. And so far, they have been proven right.
Berkshire is now sitting on a $ 12 billion gain on the warrants because Bank of America’s stock price has more than tripled to $ 24.23.
That includes a more than 42 percent increase in the 3.5 months since Donald Trump won the US presidential election.
In his annual letter to Berkshire shareholders, Buffett said if Bank of America’s current $ 0.30 per share annual dividend rose above $ 0.44 before 2019, “we would anticipate making a cashless exchange of our preferred into common.”
On the other hand, Buffett said that if the Charlotte, North Carolina- based bank’s dividend stayed below $ 0.44, “it is highly probable that we will exercise the warrant immediately before it expires.”
Bank of America spokesman Larry Di Rita declined to comment.
Many US banks, including Bank of America, were forced to slash their dividends because of the 2008 financial crisis.
Some have since boosted payouts after getting seals of approval through annual US Federal Reserve “stress tests” that examine their ability to withstand major market shocks.
Bank of America last boosted its dividend 50 percent after passing its most recent stress test in June.
The preferred investment was among several totaling more than $ 25 billion that Berkshire made from 2008 to 2011, when Berkshire was often seen as a lender of last resort.