By Christina Rexrode 

Donald Trump's presidency has been a boon to Warren Buffett, especially when it comes to the legendary investor's holding in Bank of America Corp.

Financial shares have been among the best stock-market performers since the surprise election victory on Nov. 8. Among those, Bank of America has been the standout: the stock's more-than-40% rise since Election Day is the best among the biggest U.S. banks and is 15 percentage points higher than the gain for the KBW Nasdaq Bank index.

For Mr. Buffett, who is due to release his annual letter to shareholders this weekend, that translates into a more than $5 billion windfall. And while Mr. Buffett has been a vocal critic of Mr. Trump, his investments in other bank stocks have also benefited from the Trump rally: Goldman Sachs Group Inc. is up around 36%, and Wells Fargo & Co. is up about 27%.

Representatives for Bank of America and Berkshire declined to comment.

The Bank of America windfall is thanks to a savvy investment Mr. Buffett's Berkshire Hathaway Inc. made in the bank in August 2011. At the time, the bank's shares were foundering and markets were questioning whether Bank of America would have to raise additional capital lest it sink under what some feared was a looming deluge of mortgage-related legal claims.

Mr. Buffett threw the bank a lifeline by agreeing to purchase $5 billion in preferred stock. The terms were expensive for Bank of America: The preferred stock paid a chunky 6% annual dividend, or $300 million a year, and if the bank wanted to repurchase the shares it would have to pay Mr. Buffett a 5% premium.

The real sweetener, though, was that Mr. Buffett also received warrants to purchase 700 million shares of common stock at $7.14 apiece at any time over the next 10 years. Although this was roughly where the stock was trading at the time, some investors groused this was overly generous to Mr. Buffett -- such grants are typically issued at a strike price that is higher than the current price.

The halo effect of Mr. Buffett's investment helped to quell some concerns around the stock, which rose. The share price in subsequent years rose to the midteens as Bank of America largely put its legal troubles behind it and its profitability improved.

By early November of last year, Bank of America's stock traded at around $17 a share. That left Mr. Buffett sitting on a paper gain for the warrants of around $6.9 billion.

Bank of America's postelection, share-price rally added another $5.1 billion to that, bringing his total paper profit on the warrants to around $12 billion.

That is more than double his initial investment. And it doesn't count the $300 million in annual dividends Mr. Buffett receives from the preferred stock. That amounts to about another $1.5 billion so far.

Bank of America stock opened trading Friday at $24.12 a share.

Mr. Buffett, who also made out handsomely by investing in Goldman Sachs in the depths of the financial crisis, hasn't shown signs of cashing in his Bank of America chip. In his last annual shareholder letter, Mr. Buffett said he would likely hold the warrants to "just before expiration." That is in September 2021. He also isn't likely to let go of the preferred shares soon. The bank can't redeem those shares until 2019 at the earliest.

Write to Christina Rexrode at christina.rexrode@wsj.com

 

(END) Dow Jones Newswires

February 24, 2017 10:42 ET (15:42 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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