Warren Buffett made a savvy deal in the post-financial-crisis era that gave Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) the right to purchase 700 million shares of Bank of America's (NYSE:BAC) common stock at a deeply discounted price. Although Buffett and his team had until September 2021 to exercise the warrants, the Oracle of Omaha decided to pull the trigger and add Bank of America to Berkshire's portfolio four years early.

Bank of America has a new largest shareholder

According to a press release from Bank of America, Berkshire Hathaway has officially exercised its warrants to purchase 700 million shares of the bank, and it used the $5 billion in Bank of America preferred stock it already owned to do so.

Warren Buffett speaking with the media.

Image source: The Motley Fool.

As would be expected, the bank's management seems to be happy to call Warren Buffett an investor. "In 2011, we welcomed Berkshire Hathaway as a shareholder, and we appreciate their continued support now as our largest common shareholder," Bank of America CEO Brian Moynihan said in the press release.

Bank of America's shareholders should be aware that although this will result in 700 million new shares being issued, their earnings will not be diluted. Berkshire's anticipated warrant exercise has already been included in the company's diluted EPS calculations.

Why did Buffett decide to exercise the warrants now?

The simple answer is that exercising the warrants now made sense to Buffett from a cash-flow perspective.

The original structure of Buffett's 2011 investment in Bank of America was in two parts. Berkshire purchased $5 billion in Bank of America preferred stock, which had a 6% dividend generating $300 million in annual income. In addition, Berkshire also received warrants to buy 700 million shares of the bank at any time before September 2021 for just $7.14 per share. At the time, this was close to Bank of America's actual share price. Now, it's about one-third of what the bank's stock actually trades for.

Notice that the $7.14 strike price times 700 million shares equals exactly $5 billion. This was done intentionally, and effectively allowed Buffett to simply exchange his preferred stock for 700 million shares of Bank of America.

As long as the income from the preferred shares exceeded the dividends paid by 700 million shares of common stock, Buffett was happy to leave the arrangement alone. However, after passing this year's Federal Reserve stress tests, Bank of America increased its annualized dividend to $0.48 per share, which translates to $336 million in annual income. Given the dividend raise, it no longer makes sense to collect a lower stream of income from the preferred stock.

Is Bank of America still an attractive stock to buy?

Buffett seems to think that Bank of America is still an attractive long-term investment, despite the stock price roughly tripling since 2011. In an email to the Wall Street Journal, Buffett said that "Berkshire is going to keep every share for a very long time."

In a previous letter to Berkshire Hathaway shareholders, Buffett called the Bank of America investment "one we value highly."

In addition, it's also worth noting that not only did Bank of America increase its dividend, but it more than doubled its buyback program to $12 billion for the period from July 1, 2017 through June 30, 2018. This could be a sign that Bank of America's management still thinks the stock is an attractive value, even though the share price has become much higher than in recent years.

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