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How Bank Of America Has Become One Of Warren Buffett's Best Investments

Wall Street legend Warren Buffett’s Berkshire Hathaway Inc.

· 11/19/2020 09:10

Wall Street legend Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B) filed its 13F form this week, revealing that Buffett has continued to reduce his exposure to a number of large U.S. banks.

The lone exception to Buffett’s bank selling in the third quarter was Bank of America Corp (NYSE:BAC), which Buffett was buying.

Bank of America is Berkshire’s second-largest holding, and the stock’s 14.1% gain in the last month has made it one of Berkshire’s top performers.

Roughly nine years ago when Buffett first invested in Bank of America, the company was in hot water.

Bank Of America’s Buffett Bailout: Bank of America and other big U.S. banks were at the epicenter of the financial crisis back in 2008 and 2009.

Among the banks that survived the crisis, Bank of America was one of the hardest hit. In fact, Bank of America shares dropped as low as $2.53 in early 2009 as investors questioned whether the company could avoid bankruptcy or total nationalization.

Fortunately for them, by the end of 2009 Bank of America had announced it would repay the $45 billion in bailout money it received from the U.S. government in its entirety. The stock started the 2010s back above $15.

However, the Eurozone debt crisis in 2011 sent shares tumbling back down to as low as $5.13.

Related Link: Here's How Much Investing $1,000 In Bank Of America At Great Recession Lows Would Be Worth Today

At the time, Bank of America CEO Brian Moynihan insisted the bank had plenty of capital and didn’t need an infusion from Buffett. He convinced Moynihan that a deal with Berkshire would stabilize the bank’s stock price, boost investor sentiment and also pad the bank’s cash position during a difficult period.

Buffett ended up investing $5 billion in preferred Bank of America stock redeemable at a 5% premium and paying a 5% annual dividend. In addition, Buffett received warrants to buy 700 million shares of Bank of America common stock at a price of $7.14 anytime within the next 10 years.

Right off the bat, Buffett was earning $300 million per year in dividends from his preferred shares. He waited until 2017 to exercise the warrants to buy shares of common stock at the $7.14 price. By the end of 2017, those shares were worth $20 billion, three times the size of his initial investment.

At the time of the Buffett bailout, Bank of America shares were trading at around $7.65. By late 2012, Bank of America was trading back above $10. After a volatile decade of trading, Bank of America hit its post-Great Recession high of $35.72 in December 2019.

BofA In 2020, Beyond: Bank of America shares dropped to $17.95 in March during the coronavirus sell-off, but have since recovered to above $27.

Buffett has made a fortune on his initial investment, but he's still buying the stock. In the third quarter alone, Buffett added 85 million shares to his stake, which is now valued at about $24.3 billion.

Bank of America investors who bought the day of the Buffett investment back in 2011 didn’t get the same sweet deal Buffett got, but they’ve still done pretty well over the years.

In fact, $1,000 worth of Bank of America stock bought on the day of the Buffett investment in 2011 would be worth about $4,081 today, assuming reinvested dividends.

Looking ahead, analysts are expecting minimal gains for Bank of America in the next 12 months. The average price target among the 24 analysts who cover the stock is $28, suggesting 1.4% upside.

Photo by Tony Webster via Wikimedia