Buffett's Berkshire to Become Bank of America's Biggest Holder -- 2nd Update
June 30 2017 - 8:37AM
Dow Jones News
By Rachel Louise Ensign And Nicole Friedman
Warren Buffett's firm Berkshire Hathaway Inc. said Friday that
it would buy 700 million Bank of America Corp. shares via warrants
at below-market prices, a deal that places the firm as the bank's
largest shareholder.
The move was expected after the Charlotte, N.C., bank received
permission from the Federal Reserve this week to boost its
per-share dividend to 48 cents a year. Mr. Buffett has said a
dividend of this size would prompt his company to swap its
preferred shares into common stock.
When the bank raises its dividend, Berkshire Hathaway will use
$5 billion worth of preferred shares to buy 700 million common
shares at $7.14 each, well below the current market price of $24.32
and the overall current value of $17.02 billion.
Bank of America shares rose 0.9% in premarket trading to $24.53.
The move would make the famous stock picker's firm the largest
shareholder of the second- and third-largest U.S. banks -- the
third being Wells Fargo & Co. -- while also providing a vote of
confidence for Bank of America stock.
On Wednesday, as part of the "stress test" process, the Fed
approved Bank of America's plan to pay out the dividend of 48
cents, which represents a 60% increase from the previous level of
30 cents. The regulator also approved the bank's plans to buy back
$12.9 billion worth of shares. Over the past year, the bank got
permission to buy back $7.7 billion worth of shares.
In February, Mr. Buffett said in his annual letter to
shareholders that Berkshire planned to make the switch in its Bank
of America stake if the bank could increase its annual dividend to
44 cents a share. That is because a common-stock dividend of 44
cents would pay Berkshire more than the $300 million that the
preferred stake gives the firm annually.
Berkshire bought its preferred shares in the bank in 2011, when
the lender sorely needed to shore up investor sentiment. The $5
billion deal also included warrants to buy 700 million shares of
Bank of America common stock for $7.14 apiece.
The terms, though, were expensive for Bank of America. The
preferred stock paid a chunky 6% annual dividend, or $300 million a
year. Bank of America shares have tripled since the investment,
from about $7.60 to $23.88, giving Berkshire a paper gain of almost
$12 billion. The Omaha, Neb., investor also has made about $1.7
billion in dividends on the preferred shares.
The preferred shares have little downside as long as Bank of
America stays solvent. But they have no upside either. With a
change in Berkshire's shares, Mr. Buffett effectively would be
saying that he would like to take part in possible gains on Bank of
America's stock while still enjoying a steady dividend.
After an exchange, Mr. Buffett's firm would own about 7% of the
bank's common shares, giving it a significant role in
corporate-governance issues from compensation to the election of
new directors. Currently, the largest shareholder of Bank of
America is Vanguard Group with 652.4 million shares, or a 6.6%
stake, according to FactSet.
Before his February letter, Mr. Buffett had said he would wait
to exercise the warrants, which expire in 2021.
Mr. Buffett, Berkshire's chairman and CEO, amassed stakes in a
number of lenders and financial-services companies, sometimes at
cut-rate prices around the financial crisis. Berkshire's other bank
holdings as of March 31 included Wells Fargo, Bank of New York
Mellon Corp., American Express Co., Goldman Sachs Group Inc.,
M&T Bank Corp. and U.S. Bancorp.
Bank of America shares are up about 83% over the past 12 months
in large part because of a big rally right after the November
election. But one issue for the bank is that profit gains from
higher interest rates have slowed as long-term rates have remained
low.
Big banks need approval from the Fed to increase their
dividends, a process that culminated in Wednesday's annual review
of how the lenders would perform under severely stressed economic
conditions. This is the second year in a row that Bank of America
has gotten permission to increase both its dividend and buybacks.
In the early years of the test, the bank struggled to get a clean
approval for such capital-return hikes from the regulator.
The dividend and buyback boosts are positive for Bank of America
Chairman and CEO Brian Moynihan. The 57-year-old lawyer has worked
to restore the bank's relationships with shareholders after years
of large mortgage fines and losses stemming from the bank's
crisis-era purchases of Countrywide and Merrill Lynch.
--Austen Hufford contributed to this article.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com and
Nicole Friedman at nicole.friedman@wsj.com
(END) Dow Jones Newswires
June 30, 2017 08:22 ET (12:22 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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