On Tuesday, Warren Buffett (Trades, Portfolio) traded into common shares the Bank of America warrants he procured in 2011 when the institution needed additional liquidity.
The 2011 deal Buffett famously made after calling the struggling bank’s chief executive Brian Moynihan resulted in a $5 billion investment, aimed to instill confidence in its investors as well as profit. The proceeds included preferred stock with a hefty dividend in addition to the warrants, which gave Buffett the right to purchase 700 million shares at a strike price of $7.14 per share.
Buffett’s trade comes six years and several weeks after the deal – within its 10-year deadline. Bank of America’s stock ran up 146% in that time, including a 48% leap over the past year, to a price of $23.86 per share. At a closing price of $23.58 yesterday, Buffett has made a 230% paper return on the investment. In total, he made $11.5 billion off the warrants.
"I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. 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,” were Buffett’s kind words at the time.
As noted in his 2016 shareholder, Berkshire BRK.ABRK.B can also use its $5 billion in preferred shares, on which it has been receiving $300 million per year in dividends, to pay for the exercise of the warrants. Buffett also wrote that he would likely exchange his preferred shares for common should Bank of America increase its dividend, which now stands at 39 cents, to more than 44 cents before 2021. If not, he plans to trade them shortly before the expiration date.
Despite the Bank of America holding not appearing in his top holdings, it essentially represented his fourth-largest stock investment. Bank of America will join three other financials in Buffett’s top 10: Wells Fargo & Co. WFC, American Express Co. AXP and US Bancorp USB.
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