Warren Buffett's Berkshire Hathaway to become Bank of America's largest shareholder

Roger Yu | USA TODAY

Show Caption Hide Caption Billionaire investor becomes Bank of America's largest investor Warren Buffett's Berkshire Hathaway announced that it will be purchasing 700 million shares of Bank of America Corp. making the investment firm Bank of America's largest shareholder.

Warren Buffett is bullish on banks.

Berkshire Hathaway, the investment conglomerate controlled by the billionaire, plans to spend $5 billion to buy 700 million shares of Bank of America next quarter, exercising its warrants to become the bank's largest shareholder.

In the transaction, Berkshire Hathaway, based in Omaha, will buy each Bank of America share for $7.14, a significant discount. Berkshire acquired the warrants -- a security that allows the holder to buy the warrant issuer's stock at a fixed price -- in 2011 as part of its purchase of 6% of Bank of America's preferred stock. Preferred stocks and warrants are frequently issued jointly.

Bank of America shares rose 1.8% to $24.32 Thursday after it raised dividends and announced it would buy back its shares.

Berkshire's warrants don't expire until Sept. 2, 2021. But the company chose to exercise them as Bank of America plans to increase its quarterly dividend by 60% to 12 cents per common share, beginning in the third quarter.

The Charlotte-based bank company also plans to buy back $12 billion of common stock shares from July 1 through June 30, 2018.

Bank of America's capital plans, which were formed and submitted to the Federal Reserve earlier this year, were approved after the Fed completed its annual "stress tests" this week. The Fed conducted the tests on the nation's 34 largest banks to ensure they have sufficient capital and proper operational procedures to ensure continued lending during a severe economic downturn.

All 34 banks passed the tests and their capital plans were approved by the Fed. And the positive outcome prompted investors to buy more bank stock shares Thursday, when the broader market closed down largely due to technology stock profit-taking. The S&P 500 financials index rose 0.65% Thursday.

As investors reassess tech stocks' steep gains this year, financials, health care and industrial stocks are poised for a rebound, said Joseph Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management.

In his annual letter to shareholders last year, Buffett said his company's ownership of $5 billion of preferred stock issued by Bank of America has netted Berkshire $300 million of payment per year.

Buffett said then that Berkshire would exercise the warrants if Bank of America's dividend, which was 30 cents per share annually at the time of his letter, raises it above 44 cents.

"Many of our investees, including Bank of America, have been repurchasing shares, some quite aggressively," he wrote. "We very much like this behavior because we believe the repurchased shares have in most cases been underpriced."

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