A clever investment he made in Bank of America while the bank was struggling is paying off to the tune of $12 billion, and also making him the largest stakeholder in the financial institution.
Buffett’s Berkshire Hathaway said Friday it will exercise warrants in Bank of America that will allow it to acquire 700 million common shares in the bank. These shares come in at an exercise price of $7.14 each, roughly 5 billion in total. However, Bank of America shares closed at $24.32 a share last Thursday, making the stake roughly $17 billion and bringing in $12 billion in profit for Buffett.
This payoff dates back to 2011 when Berkshire decided to invest $5 billion in preferred shares of Bank of America. At the time, the bank was struggling with numerous legal issues due to the subprime mortgage crisis. The preferred shares pay a 6 percent annual dividend, or $300 million. At a dividend of 44 cents, the common shares would pay roughly the same. At 48 cents, Berkshire would get $336 million annually.
The Buffett-led conglomerate will now become the largest shareholder of the bank, beating out surpassing Vanguard, which holds 6.6 percent, about 652 million shares, according to FactSet. The original plan was for Berkshire to not execute the warrants until right before the 2021 deadline. However, Buffett indicated a change of heart in his annual letter to shareholders.
“If the dividend rate on Bank of America common stock — now 30 cents annually — should rise above 44 cents before 2021, we would anticipate making a cashless exchange of our preferred into common,” he wrote.
As impressive as it may be, this isn’t necessarily the first time Buffett has become the primary stakeholder in a financial institution, also having a large share of Wells Fargo. In addition, he holds a sizable holding in Goldman Sachs, harkening back to him investing wisely in the financial crisis. This makes sense, considering he once said that one should try to be greedy when others are fearful.