A little over five years ago, CEO of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) Warren Buffett (Trades, Portfolio) lent the second largest bank in America money. Buffett, stepping in when confidence in the bank’s capital base wavered and its stock dropped to near financial crisis levels, got warrants for a steal, and has his profits on the move keep growing. Not listed in his portfolio, it has become his real fourth-largest position.
According to Buffett, he called Bank of America (BAC, Financial) Chairman and CEO Brian Moynihan telling him he wanted to invest in his “strong, well-led company” in August 2011. In a private offering, Buffett swept up $5 billion in preferred stock, which came with a 6% annual dividend. He also received warrants to buy 700 million shares of the company for a price of $7.14 per share, or $5 billion in aggregate, before 2021.
"I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them,” Buffett said at the time. “Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy.”
Buffett’s entrance to the scene functioned as both a capital infusion and what Moynihan called “a strong endorsement” at a time of investor doubt. That year, the market questioned whether the bank was overstating the worth of its assets. Worry also surrounded its ability to pay fines related to its mortgage violations during the housing crisis and a $10 billion lawsuit by insurer American International Group (AIG, Financial) for alleged mortgage securities fraud.
Buffett’s call on the stock has proved prescient as the bank puts its mortgage problems behind it and benefits from the financial sector’s frenzy since the election of Trump. At the end of 2015, the warrants were worth $11.8 billion, according to Buffett’s annual letter, with a share price of $16.83 per share, representing a $6.8 billion gain.
In 2016, Bank of America stock was shier; Buffett’s investment grew to $11.9 billion after a $400 million advance by Nov. 8, the day of the U.S. presidential election that Democratic nominee Hillary Clinton was projected to win. Since that day, the price bounded to a nine-year high and has come down slightly to $22.44 by Wednesday afternoon. The bump means Buffett rounded out 2016 and the first week of January with an additional $3.8 billion gain.
Many banks jumped along with Bank of America on hopes the new administration would be more business-friendly, increase interest rates and pour money into infrastructure. The financial sector rose 21.3% over the past 12 months, second only to the energy sector’s 25.1% run. That compares to the S&P 500’s 12.3% increase.
While other banks rose in tandem, no comparable ones have performed better than Bank of America, like Citigroup (C, Financial) up 20.2%, Wells Fargo (WFC, Financial) up 5.6% and JPMorgan (JPM, Financial) up 36.6%.
All told, Buffett has a $10.7 billion profit on Bank of America warrants, making it one of his most successful investments in recent years. He can also trade in his $5 billion in preferred shares to fund the purchase, which he has said he probably won’t do until near their expiration date in 2021. Adding in his $1.5 billion gain from his 6% annual dividend, Buffett’s Bank of America investment is worth $17.2 billion.
See Warren Buffett (Trades, Portfolio)’s portfolio here.
