Here’s how much Warren Buffett made on Bank of America
Famous investor Warren Buffett didn’t hesitate to talk about his love for bank stocks during the last years. Like a value investorBuffett was probably drawn to the low valuations the big banks are trading at relative to the rest of the market. Yet among all his bank holdings, Buffett seems to have a particular affinity for Bank of America (NYSE: BAC), his biggest bank holdings and his second biggest holdings in total.
Although Wells fargo (NYSE: WFC) had long been “Buffett’s bank” after Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) purchased a significant stake in Wells during the period 1989-1991, Bank of America overtook Wells Fargo in the Buffett wallet in 2018, as Buffett continued to increase an already large stake, while decreasing his stake in Wells Fargo slightly to avoid exceeding a 10% ownership threshold.
Berkshire’s stake in Bank of America dates back to 2011, but Buffett has continued to increase that initial investment over the past two years. In fact, just two months ago, Buffett applied to the Federal Reserve for permission to increase its stake in Bank of America to over 10% of the company, without the need for increased regulatory oversight – a asks he has was not ready to do for the besieged Wells Fargo.
Obviously, Buffett loves Bank of America and its leadership under Brian Moynihan, CEO. When you step back and look at how much money Buffett has already made with his holdings in Bank of America, it’s not hard to see why.
A love accord
Buffett’s first investment in Bank of America was in the form of preferred stock. Still reeling from the fallout from the 2008 financial crisis and the missteps of its former management, Bank of America found itself as a defendant in a hefty $ 10 billion lawsuit and therefore found itself looking for of capital. Enter Buffett, who in 2011 offered the bank $ 5 billion in the form of preferred stock, a type of security superior to common stocks but inferior to a bond or a note. Buffett’s preferred stock returned 6%, but more importantly, it came with warrants to buy 700,000 Bank of America shares at a fixed price of $ 7.14 per share at any time during the years. 10 following years, that is to say by 2021.
At the time, Buffett said of the Bank of America purchase:
At Bank of America, huge mistakes were made by previous management. Brian Moynihan has made excellent progress in cleaning them up, although it will take a number of years to complete this process. At the same time, he maintains a huge and attractive underlying business that will endure long after today’s issues are forgotten. Our warrants to buy 700 million shares of Bank of America will likely be of great value before they expire.
Preferred exchange for the common
In 2017, when adopting an annual Federal Reserve stress test, the bank was given more leeway to increase its dividend. Management did so, increasing its annual dividend to $ 0.48 per share, above the threshold of $ 0.44 that would have equaled the 6% return Buffett was earning on his preferred stock. Since Buffett could receive a larger annual payment of the then current dividend from Bank of America than his preferred stock, Buffett traded his preferred stock for 700 million common stock.
And Buffett keeps adding
However, the 2017 conversion was not the end of the story for Buffett and Bank of America. During 2018, Buffett increased his stake by over 30%, or $ 6.65 billion, to an average price of $ 30.34, bringing the total stake to 918.9 million shares, or 9.5% of the company, on a cumulative average cost basis. of $ 12.68.
But Buffett wasn’t quite done yet. When interest rates began to fall in 2019 and trade talks between the United States and China turned south in the second quarter of 2019, bank stocks fell. Buffett struck again, increasing its stake by an additional $ 914 million, an increase of 3.5%, at an average price of $ 29.42.
Add it all up …
The mid-2019 purchase brought Buffett’s grand total to 927.2 million shares, at an average cost of $ 13.55 per share and a total cost of $ 12.56 billion. At a current price of around $ 35, Buffett has achieved $ 19.89 billion in unrealized capital gains to date on his holdings in Bank of America.
But wait, there is more! Buffett also received a heavy dose of dividend payments, both from his preferred stock and common stock. Buffett held his preferred stock from late 2011 to early 2017, so we can assume that Berkshire received five and a half years of preferred dividends out of the $ 5 billion originally invested, for a total of $ 1.65 billion.
Then, after swapping his preferred stock for common stock in 2017, Buffett received $ 0.24 per share in dividends in the second half of the year, good for an additional $ 168 million.
In 2018, when Buffett increased his stake, Berkshire received an additional $ 0.54 per share in dividends. At an assumed average number of shares of 810 million shares, that’s an additional $ 437 million.
Finally, in 2019, Berkshire will receive $ 0.66 per share in dividends. Assuming an average number of shares slightly lower than the current 927.2 million, that adds up to an additional $ 605 million.
Drum roll please …
Add it all up and Buffett received $ 19.89 billion in capital gains, plus $ 1.65 billion in preferred dividends, plus $ 1.21 billion in ordinary dividends – for a total of $ 22.75 billion.
Needless to say, a profit of $ 22.75 billion on a $ 12.56 billion investment is a great result, representing a total gain of 181% in just eight years. That would equate to an annualized return of 13.8%, but remember that around 35% of Buffett’s stake was purchased in the past two years alone, so its average annual return is significantly higher than that.
Bank of America stocks also didn’t have to work miracles to generate these returns; even after the stock rose, it only trades 13 times earnings, still well below the Multiple P / E of the global market.
That’s an incredible return for an investment in a very large, conservatively managed bank that had little possibility of permanent capital loss, and it’s further proof that Buffett is the greatest value investor of all time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.