This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 1, 2017).
Warren Buffett's firm Berkshire Hathaway Inc. said Friday that it would buy 700 million Bank of America Corp. shares via warrants at below-market prices, a deal that places the firm as the bank's largest shareholder.
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The move was expected after the Charlotte, N.C., bank received permission from the Federal Reserve this week to boost its per-share dividend to 48 cents a year. Mr. Buffett has said a dividend of this size would prompt his company to swap its preferred shares into common stock.
When the bank raises its dividend, Berkshire Hathaway will use $5 billion worth of preferred shares to buy 700 million common shares at $7.14 each, well below the current market price of $24.32 and the overall current value of $17.02 billion.
"We appreciate Mr. Buffett's continued support for the long-term value we are delivering through responsible growth and we welcome his decision, " Bank of America said in a statement.
Bank of America shares rose 0.9% in early trading to $24.53. The move would make the famous stock picker's firm the largest shareholder of the second- and third-largest U.S. banks -- the third being Wells Fargo & Co. -- while also providing a vote of confidence for Bank of America stock.
On Wednesday, as part of the "stress test" process, the Fed approved Bank of America's plan to pay out the dividend of 48 cents, which represents a 60% increase from the previous level of 30 cents. The regulator also approved the bank's plans to buy back $12.9 billion worth of shares. Over the past year, the bank got permission to buy back $7.7 billion worth of shares.
In February, Mr. Buffett said in his annual letter to shareholders that Berkshire planned to make the switch in its Bank of America stake if the bank could increase its annual dividend to 44 cents a share. That is because a common-stock dividend of 44 cents would pay Berkshire more than the $300 million that the preferred stake gives the firm annually.
Berkshire bought its preferred shares in the bank in 2011, when the lender sorely needed to shore up investor sentiment. The $5 billion deal also included warrants to buy 700 million shares of Bank of America common stock for $7.14 apiece.
The terms, though, were expensive for Bank of America. The preferred stock paid a chunky 6% annual dividend, or $300 million a year. Bank of America shares have tripled since the investment, from about $7.60 to $23.88, giving Berkshire a paper gain of almost $12 billion. The Omaha, Neb., investor also has made about $1.7 billion in dividends on the preferred shares.
The preferred shares have little downside as long as Bank of America stays solvent. But they have no upside either. With a change in Berkshire's shares, Mr. Buffett effectively would be saying that he would like to take part in possible gains on Bank of America's stock while still enjoying a steady dividend.
After an exchange, Mr. Buffett's firm would own about 7% of the bank's common shares, giving it a significant role in corporate-governance issues from compensation to the election of new directors. Currently, the largest shareholder of Bank of America is Vanguard Group with 652.4 million shares, or a 6.6% stake, according to FactSet.
Before his February letter, Mr. Buffett had said he would wait to exercise the warrants, which expire in 2021.
Mr. Buffett, Berkshire's chairman and CEO, amassed stakes in a number of lenders and financial-services companies, sometimes at cut-rate prices around the financial crisis. Berkshire's other bank holdings as of March 31 included Wells Fargo, Bank of New York Mellon Corp., American Express Co., Goldman Sachs Group Inc., M&T Bank Corp. and U.S. Bancorp.
Bank of America shares are up about 83% over the past 12 months in large part because of a big rally right after the November election. But one issue for the bank is that profit gains from higher interest rates have slowed as long-term rates have remained low.
Big banks need approval from the Fed to increase their dividends, a process that culminated in Wednesday's annual review of how the lenders would perform under severely stressed economic conditions. This is the second year in a row that Bank of America has gotten permission to increase both its dividend and buybacks. In the early years of the test, the bank struggled to get a clean approval for such capital-return hikes from the regulator.
The dividend and buyback boosts are positive for Bank of America Chairman and CEO Brian Moynihan. The 57-year-old lawyer has worked to restore the bank's relationships with shareholders after years of large mortgage fines and losses stemming from the bank's crisis-era purchases of Countrywide and Merrill Lynch.
--Austen Hufford contributed to this article.
Corrections & Amplifications Berkshire Hathaway said Friday that it would buy 700 million Bank of America shares via warrants. An earlier version of this article incorrectly stated Berkshire would buy 7 million BofA shares in one instance. (June 30, 2017)
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July 01, 2017 02:47 ET (06:47 GMT)