Investopedia/Nathan Rieff: Warren Buffett Makes $12 Billion on a Single Bank of America Investment

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Warren Buffett Makes $12 Billion on a Single Bank of America Investment (BAC, BRK-A) By Nathan Reiff | June 30, 2017 — 9:31 AM EDT
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Six years ago, while Bank of America (BAC) was struggling in the years following the financial crisis, Warren Buffett had tremendous foresight, as only an investor like Warren Buffett would. Buffett's Berkshire Hathaway (BRK-A) has just announced that it will exercise warrants in BAC stock, acquired at that time, to purchase 700 million common shares at an exercise price of only $7.14 each. The total Berkshire will pay is roughly $5 billion. However, with BAC shares closing yesterday at $24.32 per share, the stake is worth over $17 billion, meaning that Buffett gains a quick profit of $12 billion on a single investment.
Increase of Annual Dividend Spurs Warrant Exercise

Berkshire's decision to exercise the warrants now seems to have been initiated in part by Bank of America's decision earlier this week to hike its annual dividend, increasing it to 48 cents per share. This represents a 60% gain. Buffett had the option of sitting on the warrants until 2021.

The story of this investment move began in 2011, when Berkshire made a deal to invest $5 billion in preferred shares of Bank of America's stock. Those shares pay a 6% dividend per annum, or roughly $300 million. With a dividend of 44 cents, the common shares would pay about the same each year, and with the rate hike to 48 cents, Berkshire stands to get $336 million annually.
Buffett Expects Increase?

Analysts at CNBC have speculated that Buffett's decision to exercise his warrants is a bullish move, and that the Oracle of Omaha expects BAC stock to rise in price. By the start of trading on Friday, BAC shares were up 7% for the week.

It is expected that Bank of America will make the dividend increase official by the beginning of the third quarter of the year: this coming Monday. Berkshire will officially wait to exercise the warrants until that time, meaning that Buffett could stand to gain even more than $12 billion in the stock climbs higher through the end of the week. The move will also position Berkshire as the largest stakeholder in the Bank, as Buffett overtakes Vanguard, which holds 6.6% of shares.

Buffett indicated his shift in plans to potentially exercise the warrants before the 2021 deadline in an earlier annual letter to Berkshire shareholders. "If the dividend rate on Bank of America common stock-now 30 cents annually-should rise above 44 cents before 2021, we would anticipate making a cashless exchange of our preferred into common," he indicated. It seems that Berkshire will do just that, netting at least $12 billion in easy profit through the process. Berkshire is already the largest shareholder in other big bank Wells Fargo (WFC).
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