The Bank of America took a big hit during the financial crisis which affected financial institutions all over America. However, the institution has recovered fairly well as the share price doubled in 2016. Now, Warren Buffett has mentioned that his company Berkshire Hathaway may invest more in Bank of America shares if the share value increases from the current 30 cents to 44 cents.
In the letter to the shareholders of Berkshire, Buffett discussed the possibility of buying more stocks of Bank of America. Currently, Berkshire owns $5 billion preferred stocks of Bank of America. It currently pays a dividend of $300 million and it also includes a warranty to purchase 700 million common shares before 2021. This privilege will bring about $10.5 billion for Berkshire and it enables the cashless purchase of the additional common stocks using the preferred stocks.
When Bank of America was struggling to regain its hold in the finance industry, Berkshire proved to be one of its saviors. Buffett, known for his excellent predictions on share value endorsed the recovery activity of the bank by purchasing preferred stocks during its recovery stage. For Berkshire, the preferred stocks brought in an excellent dividend, but the warrant to purchase common stocks proves to be even more lucrative as BOA has recovered remarkably.
In less than six years, Berkshire was able to increase its investment nearly four times with the huge increase in dividends. The actual plan to purchase common stocks will hugely depend on the price movement of the BOA shares. Buffett expressed his satisfaction that BOA is focused on repurchasing shares quite aggressively. This means that investors can enjoy good dividends as the company grows and outstanding shares decrease.
Buffett previously said that corporate failure is mainly due to the selling of more shares. The dilution will result in lesser dividend for the shareholders. The BOA was hailed as a King of Dilution as it fought to prevent bankruptcy during the financial crisis. The shares of BOA were held up due to the investment of Buffett. When BOA was on the verge of collapse due to mortgage securities defaulting, Buffett pinned his hopes on the company as he said that even a modest recovery would be beneficial for Berkshire. His predictions became true as BOA recovered in a much better way as the stock price has quadrupled in the current scenario.
By 2015, the shares of BOA were recovering, but the best was yet to come. The presidential election and surprise win of Donald Trump boosted the share price of BOA as it increased by 43%. The financial services industry greatly benefited from the hopes of fewer regulations, increased interest rates, and economic boost. The surge in share prices after the election increased the profits of BOA to $12 billion.
Investors may be tempted to blindly follow the actions of Warren Buffett to buy the shares of BOA. However, you should know that Buffett will gain huge profits because he has a warrant to purchase the shares at a much lower price due to his deal. Now, the shares cost more, but it is still a good buy.