Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), the conglomerate run by billionaire investor Warren Buffett, announced that it's selling around 9 million shares of Wells Fargo (NYSE: WFC) stock. At first glance, this may sound like an alarming development -- after all, Wells Fargo is one of Berkshire's largest stock investments and is a company Buffett has praised many times. However, Buffett's reasons for selling have nothing to do with the stock as an investment.
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Berkshire is selling millions of shares of Wells Fargo stock
Berkshire Hathaway said on April 12 that it's selling about 9 million shares of its Wells Fargo stock position. It has already sold 7.1 million shares and plans to sell another 1.9 million.
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This may sound like a massive amount of stock (and it is, to most people), but this move will still leave Berkshire with about 491 million shares of the banking giant. So the sale represents less than 2% of Berkshire's total Wells Fargo stake.
In addition, Berkshire specifically says that the sale has nothing to do with Wells Fargo, or the notorious "fake accounts" scandal that made headlines in 2016. Instead, the company is selling some of its Wells Fargo stock to keep its position below 10% of the bank's total outstanding shares, allowing it to avoid additional Federal Reserve regulations.
It's also important to point out that it could (and probably will) need to sell more of its shares in future quarters, for the same purpose. As Wells Fargo repurchases shares of its own stock, Buffett's stake will represent a growing percentage of the company, so further sales could be necessary to stay under the 10% threshold in the long term.
If you glance at Berkshire's portfolio, you'll notice that the company's Wells Fargo stake makes up just about 9.55% of the outstanding shares, so it may seem as if the stake is already small enough to satisfy regulators. However, Buffett owns a smaller piece of Wells Fargo in his personal account, which, combined with Berkshire's shares, made the total stake he had influence over exceed the 10% threshold.
What's the big deal with owning 10% of a bank?
Without getting too technical, the Federal Reserve exerts more oversight on investors with large stakes in banks -- defined as 10% or more. What's more, to continue to own more than 10% of Wells Fargo, Berkshire would need permission from the Fed and would need to make the case that it had no intention to exert a "controlling influence."
In July 2016, Buffett made such a request, stating at the time that "Berkshire is seeking permission to retain its current ownership position ... and to acquire additional shares of common stock of Wells Fargo for investment purposes." The application also made clear that Berkshire had no plans to make any significant changes to Wells Fargo's strategy or structure, nor did it have any desire to make changes to the bank's board.
However, as part of the announcement made recently revealing the sale of some of his shares, Berkshire said that after months of talks with Fed officials, keeping the stake of more than 10% wasn't in Berkshire's best interest.
The key takeaway
Warren Buffett and his team are selling Wells Fargo shares to control the size of its position, not because of anything to do with the bank as a long-term investment.
Keep in mind that this is a similar activity to the portfolio rebalancing many investors do regularly. For example, I recently revealed that after doubling over the past year, Bank of America (NYSE: BAC) has become my largest stock holding. I still think Bank of America has massive upside potential, but It's likely that I'll end up selling some of my shares in the near future. Nothing against the stock -- I just want to keep my position at a certain size. Similar logic applies here.
The bottom line is that you shouldn't read too much into this move. To keep the size of his Wells Fargo stake under a certain threshold, Buffett is selling less than 2% of his shares. There's no reason to think that Wells Fargo isn't still one of Buffett's favorite banks, or that the selling will continue. If you have a positive opinion of Wells Fargo as a long-term investment, this news shouldn't change your mind.
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