Bank of America Preferred

[valueinvesting101]

Nice 20% move in common stock for BAC. So Berkshire preferred go up in value by about $2.5 billion pretax. Current dividend for BAC is 30 cents/year. With higher ratio likelyhood dividend going above 44 cents /year is higher.

 

At that threshold it is better for Berkshire to convert preferred into common and get higher dividend than 6% on $5 billion. Is there any other consideration for holding preferred? Is interest on preferred tax advantageous over dividend?

 

Also do you think Buffet will convert this position into zero cost shares similar to GS and GE situation or convert all 700 million shares at $7.14?

 

 

 

[Mephistopheles]

I think he will convert all 700 million shares. They have tons of cash needing to be used and BAC is becoming more and more like WFC which he may not be able to increase above the 10% threshold.

[valueinvesting101]

Alternatively, they can choose to receive 450 million shares without paying anything which will be equivalent to $9 billion ~ Berkshire's profit for the transaction.

 

These 450 million shares will have cost basis of 0 and then purchase additional 250 million shares for $5 billion which will have basis of $20/share. This will achieve same effect of getting 700 million shared for $5 billion but with different cost basis.

 

This is useful for tax purpose if they ever need/want to sell these shares.

 

But then question become should be buying additional BAC at $20 or WFC at $53.22 or something else. I feel Buffet has indicated preference to buy more WFC or PSX or nothing rather than BAC at prices below current level.

[Txvestor]

Alternatively, they can choose to receive 450 million shares without paying anything which will be equivalent to $9 billion ~ Berkshire's profit for the transaction.

 

These 450 million shares will have cost basis of 0 and then purchase additional 250 million shares for $5 billion which will have basis of $20/share. This will achieve same effect of getting 700 million shared for $5 billion but with different cost basis.

 

This is useful for tax purpose if they ever need/want to sell these shares.

 

But then question become should be buying additional BAC at $20 or WFC at $53.22 or something else. I feel Buffet has indicated preference to buy more WFC or PSX or nothing rather than BAC at prices below current level.

 

If that was the plan however, wouldn't it have made sense to initiate the position earloer this uear when it was trading in the low teens? Its nit like they were hurting for cash at any time in recent memory.