How Buffett's Bank of America Bet Changes With the Fed Stress Test
June 28 2017 - 5:59AM
Dow Jones News
By Rachel Louise Ensign and Nicole Friedman
Warren Buffett's firm may soon become the biggest shareholder in
Bank of America Corp.
The Charlotte, N.C., bank, the second largest in the country by
assets, is expected to get a stress-test result from the Federal
Reserve Wednesday that would allow it to boost its dividend. A
higher dividend is something Mr. Buffett has said could prompt his
Berkshire Hathaway Inc. to swap its preferred shares in the bank
into about $16 billion worth of common stock.
The move would make the famous stockpicker'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.
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 from its recent level of 30 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, far below the
current price.
The preferred shares have little downside, so 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 as well as enjoy 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 a 6.6% stake, according to a FactSet analysis
of recent regulatory filings.
Before his February letter, Mr. Buffett had said he would wait
to exercise the warrants on common shares. The warrants last until
2021.
No matter what Mr. Buffett decides, a dividend boost would be
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.
Big banks need approval from the Federal Reserve to increase
their dividends, a process that culminates in Wednesday's annual
review of how the lenders would perform under severely stressed
economic conditions.
Several analysts have predicted the bank would be allowed by the
Fed to increase its dividend to 44 cents a share or more, while
others see a smaller dividend increase. The bank hasn't discussed
exactly what it is planning to request but in years past has
updated shareholders about its plans shortly after the Fed's
stress-test release.
It isn't clear how soon after a potential Fed approval that a
Berkshire exchange could happen. Mr. Buffett couldn't be reached
for comment.
When the Omaha-based investor bought the preferred shares, Bank
of America was slumping, losing confidence among many investors.
Mr. Buffett helped to change that narrative by agreeing to purchase
$5 billion in preferred stock and calling the bank "well led," an
important endorsement for Mr. Moynihan about 1 1/2 years after he
had risen to the chief-executive role.
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 $23.27, giving Berkshire a paper gain of around
$11 billion. Berkshire also has made about $1.7 billion in
dividends on the preferred shares.
Mr. Buffett, Berkshire's chairman and chief executive, 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 include 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 91% 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.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com and
Nicole Friedman at nicole.friedman@wsj.com
(END) Dow Jones Newswires
June 28, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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