Warren Buffett said on Saturday he plans to stick with the shrewd bet that his Berkshire Hathaway Inc (>> Berkshire Hathaway Inc.) made on Bank of America Corp (>> Bank of America Corp), but might eventually swap the preferred stock that Berkshire owns into common stock.
Berkshire bought $5 billion (£4.01 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 U.S. bank's capital needs.
More importantly, Buffett also received warrants to buy 700 million Bank of America common shares at $7.14 each, roughly where the stock traded, 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 3-1/2 months since Donald Trump won the U.S. presidential election.
In his annual letter to Berkshire shareholders, Buffett said if Bank of America's current 30 cents per share annual dividend rose above 44 cents 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 44 cents, "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 U.S. 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 U.S. 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 totalling more than $25 billion that Berkshire made from 2008 to 2011 in Dow Chemical Co (>> Dow Chemical Co), General Electric Co (>> General Electric Company), Goldman Sachs Group Inc (>> Goldman Sachs Group Inc) and other companies, when Berkshire was often seen as a lender of last resort.
Most have since been redeemed, and Buffett has lamented the loss of their mid- to high- single-digit or double-digit income streams.
The Goldman investment also included cashless warrants to buy common stock. Berkshire ended 2016 with 11.39 million Goldman shares, and assuming it still owns them is sitting on a nearly $2.2 billion gain.
(Reporting by Jonathan Stempel in New York; Editing by David Gregorio)
By Jonathan Stempel