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.