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.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!