If you’ve been reading the financial news today, you might have heard that veteran investor and market-mover Warren Buffett invested $5 billion into the battered Bank of America. For this $5 billion investment, Buffett’s Berkshire Hathaway receives preferred shares, a type of investment that’s beyond the reach of most other investors. These shares come with a 6 percent dividend each year compared to the much lower dividend available with common shares.
Buffett’s investment could be seen as a significant endorsement in the future of Bank of America, a bank that is still in the process of settling a class-action lawsuit pertaining to overdraft fees and whose common stock price is down more than 40% this year.
The bank was willing to pay for this endorsement, offering the preferred shares at a $1.4 billion discount. In addition, when Buffett wants to redeem these shares, Bank of America will pay a 5% premium over valuation. Buffett’s standing put him in a powerful to negotiate the terms of the investment, and the bank could easily decide the size of the discount it would be prepared to offer in order to win Buffett’s endorsement.
This could be an opportunity to ride the wave, if you believe as Warren Buffett does that the government will never let Bank of America fail and that the long-term prospects of the bank’s profitability are secure. Just don’t expect to receive the same benefits Warren Buffett does for his investment. We average investors must settle for common shares and no special deals.
I’m not chasing Warren Buffett’s investment, but I would if I could get a 6% dividend and the other extras that come with preferred stock.
Update: Preferred stock is available for average investors. Morningstar explains how to set up a structure similar to, though not on the same terms as, Warren Buffett’s investment.
Updated May 22, 2012 and originally published August 25, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.
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Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke, also known as Flexo, has contributed to PC World Magazine, US News, Forbes, and other publications. 
{ 12 comments… read them below or add one }
BAC badly needed a vote of confidence at this time from a big name in the investment world. Take a look at PFF for a yield over 7%.
This doesn’t surprise me at all. He helped out Goldman the same way. BAC had to give him a good deal just like people who have low FICO scores have no choice.
Though look at the price of GS now. It’s the same price as when Buffett initially invested. So as a retail invested if you held during this period (ie you bought right after he did) you would have no net profit. He’s doing much better because of the terms of his purchase.
He is making money from all other investors that quickly invested after him…the stock may go up or down in which it will affect the small investors but he will continue to make money upon the terms of his purchase
I hadn’t heard the news of Buffet’s foray into BofA until I saw it Tweeted by one of my followers.
I agree with The Biz of Life in that Buffet’s involvement gives the bank a boost it really needs.
By the looks of things and based on this post, it seems as though he has brokered a super sweet deal for himself. But what else could we expect from him? :)
Preferred shares at a massive discount along with a 5% premium upon selling them. I almost want to invest in the bank myself now.
Nice post!
TWC
It looks like a vote of confidence, but Buffett is getting a lot in return. Did anyone ever check his GS bailout? I’m thinking he made out ok in that deal, too. If a regular investor followed him in that deal and got a decent return, could they use that situation as a guide for getting into BoA?
not exactly, GS is around the same price as when Buffett invested in it. If someone followed his investment and invested afterwards they would see not that much of a profit…it is under the terms of his purchase that is what makes Buffett…Buffett!
So this makes it about 15 years for breakeven if the stock is worth nothing in 15 years. Not too bad for a long term investment with a 35% (or better if held longer) rate of return.
Correct me if I’m wrong, but I think anyone can buy preferred shares, just not at
quite the same discount as Mr. Buffett is getting.
Harm: that’s right. I updated the article to include a link to Morningstar’s discussion of how an investor could go about creating a similar investment, though without the discount.
Does anyone know if the purchase was for Berkshire’s Class A shares or Class B shares?
wouldn’t it be class A? being that it is valued more?