Berkshire has warrants to buy 700 million common shares of Bank of America at $7.14 each, or about $5 billion. And Bank of America just did what Berkshire was waiting for: after passing the second of two annual stress tests by the Federal Reserve, it got the go-ahead to hike its annual dividend to 48 cents a share, or 12 cents a quarter, a 60 percent increase.
That is enough for Berkshire to consider exercising those warrants rather than waiting until just before their expiration in 2021. At Bank of America's current share price, the stake would hand Berkshire a tidy $11.7 billion profit, at least on paper.
It all goes back to Berkshire's 2011 deal to invest $5 billion in preferred shares of Bank of America, which at the time was struggling with numerous legal issues in the wake of the subprime mortgage crisis. The preferred shares pay a 6 percent annual dividend, or $300 million. At a dividend of 44 cents, the common shares would pay roughly the same. At 48 cents, Berkshire would get $336 million annually.
A move to exercise the warrants would be seen as bullish for Bank of America shares, an expression of confidence by Berkshire that they have upward momentum. They rose 2.6 percent on Wednesday, to close at $23.88.