Warren Buffett Won’t Abandon Bank of America

Source: The Motley Fool.

Two years ago, Warren Buffett called Bank of America Corp (NYSE:BAC) CEO Brian Moynihan to suggest a deal.

In exchange for a $5 billion investment, which would serve as a vote of confidence in the nation’s second largest lender, Berkshire Hathaway Inc. (NYSE:BRK.B) received preferred stock that paid a 6% annual dividend and warrants for 700 million shares of common stock with an exercise price of $7.14 a share, the market price at the time.

hedge funds vs. mutual funds

Fast-forward to today, and the warrants alone have earned Berkshire more than $5.1 billion in paper profits.

But is Buffett going to cut and run? Not by the sounds of it.

“We’ll exercise them probably the last month, which would be eight years or so from now. There’s no reason to exercise them sooner,” the Omaha-based billionaire told CNBC’s Becky Quick last week. “There would be if there were a high dividend on the common or something, so it’s conceivable. But basically we love the position of being an owner.”

It’s worth contrasting this with a similar deal that Buffett inked with Goldman Sachs Group, Inc. (NYSE:GS) in late September 2008, at the nadir of the financial crisis.

Like the Bank of America agreement, Berkshire injected $5 billion into the fabled investment bank. But unlike that deal, Berkshire received preferred stock yielding 10% and warrants to purchase $5 billion worth of common stock for $115 per share — an 8% discount to the market price at the time.

Again, fast-forward to today, and Buffett has concluded the transaction. Goldman redeemed the preferred stake for $5.5 billion in April 2011 and, earlier this year, did the same with the warrants. All told, Berkshire earned a $3.2 billion profit on the four-and-a-half-year-old investment, equating to a 64% return.

So is it good for Bank of America’s shareholders that Buffett isn’t pushing for a similar premature conclusion with the bank?

I believe that it is.

In the first case, as Moynihan pointed out during the same interview on CNBC, it gives Bank of America the opportunity to “get 8%, 9% instruments out” of the capital structure first. Remember, Buffett’s preferred stake yields a comparatively cheap 6%.

And in the second case, it delays a dilutive impact on the common shares for at least the foreseeable future. At present, Buffett’s warrants are equivalent to 6.5% of the entire company.

There will be a time when the two sides agree to end this mutually beneficial partnership. But until then, Buffett will keep collecting its preferred dividends and Bank of America can continue basking in the glow of the billionaire’s reputation.

The article Warren Buffett Won’t Abandon Bank of America originally appeared on Fool.com and is written by John Maxfield.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America, Berkshire Hathaway, and Goldman Sachs and owns shares of Bank of America and Berkshire Hathaway.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!