The big winner on a down day for the stock market is Warren Buffett and Bank of America (BAC). Bank of America is up 9% on a day when the market is down 200 points. In a surprising move, Buffett made a $5 billion dollar investment in the banking giant that helped to stop its shares from sliding. Buffett has once again stepped up to rescue one of America’s struggling blue chip companies.
Buffett’s Great Deal
Buffett’s company,Berkshire Hathaway is buying 50,000 shares of preferred stock in Bank of America. These shares have a liquidation value of $100,000 per share. In return for this $5 billion dollar loan, Bank of America will pay Buffett $300 million dollars in dividends a year. That is a 6% annual dividend return guaranteed. That dividend yield is fantastic for a lage cap company.
This was a good move for BofA because it helps to calm market fears about the bank being unsafe. Buffett’s investment in General Electric and Goldman Sachs did the same thing for those companies during the financial crisis of 2008. Buffett was able to get even better terms on preferred stock investments in those companies.
Bank of America can exit the deal at any time. All the bank has to do is repay Buffett’s $5 billion dollar investment and pony up an additional 5% dividend payout. I think that BofA will look to exit this deal in 2013. Even if the bank does not need the capital, Bank of America should hold onto it to reassure investors. The Buffett investment will dilute earnings in the short term but should help the bank over the long term.
As a Bank of America shareholder, I never feared that the bank was in danger of collapse. The stock may be down 40% for the year but I still see it as a value play and have been purchasing more. Buffett owns a small position in the common stock right now but obviously feels that the preferred shares are a much better deal. This is proof once again that Buffett can make money in any market.