Bank of America rises after Warren Buffett becomes its biggest shareholder

Bank of America is up about 0.55% after Warren Buffett became the company’s largest stakeholder.

In a $US5 billion investment in 2011, Buffett bought a large chunk of preferred shares in the company which paid about $US300 million annually in dividends. Those preferred shares came with the right to convert them into common stock for $US7.14 a share, which Buffett did on Tuesday.

Buffett’s original investment in the company came with such favourable terms because it acted as a vote of confidence in Brian Moynihan, the bank’s then-new CEO, at a time when Bank of America was still trying to put the financial crisis behind it.

Converting the preferred shares to common stock means Buffett is now the largest shareholder in Bank of America, holding about 6.6% of the company. Shares of the bank are currently trading for about $US23.71 a share, which means Buffett’s original investment is up 232.07% since 2011.

Buffett had preempted the conversion of shares by saying he would do so as soon as the stock price was high enough to make holding common stock more attractive than the dividend payments from the preferred shares. After passing a stress test in June, the company was allowed to increase its dividend to 12 cents a share, which puts payments from 700 million shares around $US336 million annually.

Bank of America is up 5.05% so far this year.

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