Will this company soon be Buffett's biggest holding?
Believe
it or not, Bank of America (ticker: BAC ) could soon become the single
largest holding of Warren Buffett's Berkshire Hathaway (BRK-A ) .
Shocking, I know, but the math is really quite simple.
Two
and a half years ago, Buffett invested $5 billion in Bank of America.
In exchange, Berkshire received a corresponding amount of preferred
stock that pays a 6% dividend, and warrants to buy 700 million shares of
the bank's common stock at an exercise price of $7.14 per share. The
warrants expire in September of 2021.
At
today's price of roughly $17.90, Berkshire has already more than
doubled its initial investment -- and that excludes the preferred stake.
The common-stock position has been so lucrative, in fact, that it's
become, in effect, Berkshire's fifth largest equity holding.
So,
here's the question: What will it take for Bank of America to supplant
Wells Fargo (WFC ) at the top of Berkshire Hathaway's portfolio? And the
answer is: Not as much as you might think.
Berkshire
currently owns a little over 490 million shares of Wells Fargo valued
at approximately $24 billion. Meanwhile, Berkshire's combined stake in
Bank of America is worth a little more than $17.5 billion -- $5 billion
for the preferred stock and $12.5 billion for the current value of the
warrants.
Because
the value of the preferred stake is essentially fixed, this means that
the value of Berkshire's warrants will have to appreciate by around $6.5
billion. While that sounds like a lot, it isn't a considerable as you
might think.
For
this to happen, Bank of America's shares would need to increase by
about $9.30 each. To be clear, that's no small accomplishment given that
they've already climbed by 80% over the last two years. Additionally,
there's every reason to believe that Wells Fargo's shares will continue
to appreciate as well.
But
Wells Fargo's stock trades for 1.62 times book value while the multiple
on Bank of America's stock is 0.84 times book. To become Berkshire's
largest holding, in turn, all Bank of America would need to do is close
this gap by a little more than half.
Is that possible? Absolutely.
Once
Bank of America puts the remainder of its financial crisis liabilities
behind it (which could happen this year), it isn't unreasonable to think
that the market will value its shares at more than one times book. And
from there, it's only a hop, skip, and a jump to the 1.3 multiple that
Bank of America needs to become, at least by holding size, Buffett's
favorite bank.
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Opinion reader :
Apparently
Buffett’s investment has gone beyond expectations. No one was expecting
that Buffett’s investment would be that profitable. The fact that
Berkshire has already more than doubled its initial investment has
answered everything. The common-stock position has been so lucrative, in
fact, that it's become, in effect, Berkshire's fifth largest equity
holding. Isn’t that beyond your expectation?
And here popped up a question : What will it take for
Bank of America to supplant Wells Fargo at the top of Berkshire
Hathaway's portfolio? And the answer is: Not as much as you might think.
Berkshire currently owns a little over 490 million
shares of Wells Fargo valued at approximately $24 billion. Meanwhile,
Berkshire's combined stake in Bank of America is worth a little more
than $17.5 billion -- $5 billion for the preferred stock and $12.5
billion for the current value of the warrants.
Bank of America needs to work harder to become
Berkshire's largest holding, in turn, all Bank of America would need to
do is close this gap by a little more than half. Is that even possible?
The answer is just a simply yes.
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