Because of an astute investment made in Bank of America six years ago while the bank was struggling, Warren Buffett is about to make a quick US$12 billion (S$16.5 billion) and become the financial institution's largest shareholder.
Buffett's Berkshire Hathaway said Friday it will exercise warrants in Bank of America that will allow it to acquire 700 million common shares in the bank at an exercise price of just US$7.14 each, or about US$5 billion.
Bank of America shares closed Thursday at US$24.32 a share, making that stake actually worth more than US$17 billion. So it's a quick US$12 billion paper profit for the Oracle of Omaha.
After passing the second of two annual stress tests by the Federal Reserve, Bank of America said Wednesday it would hike its annual dividend to 48 cents a share, or 12 cents a quarter, a 60 per cent increase.
That was enough for Berkshire to consider exercising those warrants rather than wait until just before their expiration in 2021.
This all goes back to Berkshire's 2011 deal to invest US$5 billion in preferred shares of Bank of America, which at the time was struggling with numerous legal issues in the wake of the subprime mortgage crisis. The preferred shares pay a 6 per cent annual dividend, or US$300 million. At a dividend of 44 cents, the common shares would pay roughly the same. At 48 cents, Berkshire would get US$336 million annually.
A move to exercise the warrants would be seen as bullish for Bank of America shares, an expression of confidence by Buffett that they have upward momentum. They rose 1 per cent in premarket trading Friday to US$24.58. They were already up 7 per cent on the week.