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If Buffett Likes Moynihan as BofA Chairman and CEO, Should You?

Bank of America Corp. (NYSE: BAC) has been under fire for the consolidated chairman and CEO role. Brian Moynihan now has both titles and oversight of the bank, but there is an activist and outside movement to pry the chairman role from being the same person as the chief executive.

There are of course many solid arguments for and against splitting these roles. But now Moynihan has a reconfirmed cheerleader in Berkshire Hathaway Inc. (NYSE: BRK-A) and Warren Buffett. Why this matters so much is that Buffett is a major stakeholder in Bank of America. This stake is of course behind the scenes, due to it being convertible preferred shares, but it was a $5 billion investment that happens to be worth far more than that today.

A CNBC appearance by Buffett on Tuesday, September 8, had many market observations and discussed several key stakes. Still, he came out in favor of Moynihan. 24/7 Wall St. has shown below how the Bank of America stake fits in among 20 most dominant Buffett positions. We have also included an unofficial transcript from what Buffett said on his CNBC appearance.

Despite all the perceived controversy and criticisms, Bank of America recently was shown to be among the few stocks receiving multiple analyst upgrades.

Buffett Transcript (With Becky Quick From CNBC)

Warren Buffett: Well if I could vote, I would vote as management suggests, which is to have Brian take on the CEO and Chairman job.

CNBC Host Becky Quick: Are you bothered by the idea of just how it was done? How the Board did this and ignored what was a binding proxy vote from 2009?

Buffett: I guess they’re putting it back to the shareholders now, so I’m not bothered. I do not think that’s a big deal. I think that what Brian does, Brian has done, he took a company that was just a terrible mess, I mean it’s been virtually destroyed, the public hated it, the government hated it. They had all kinds of lawsuits coming in and employee morale was terrible. And he’s resuscitated it and I think he has done a first class job. And if he is the Chairman as well as the CEO, God bless him.

Quick: It was a company in crisis and as somebody who has been in business for a long time you’ve been through a crisis or two yourself. And I think you’ve even come up with a motto that you tell people to stick with: get it right, get it fast, get it over, but get it right first. And that has been your way.

Buffett: Yeah, you got to get it right, then get it fast, get it out and get it over. But you got to get it right first. And that’s what he’s worked at doing.

Buffett Investment in Bank of America

Bank of America is easily among the top Buffett bank stakes, but not in common shares — not yet at any rate. This stake came from when Buffett invested $5 billion of Berkshire Hathaway’s cash into Bank of America preferred shares and warrants in 2011. Without a bad visual image, Buffett even said at the time that he came up with the idea to invest in a Bank of America package while he was sitting in the bathtub.

Berkshire Hathaway owns 50,000 shares of 6% non-cumulative perpetual preferred stock in Bank of America with a liquidation value of $100,000 per share and warrants to purchase 700,000,000 shares of common stock. Bank of America may not redeem the preferred shares before May 7, 2019, and the redemption price is $105,000 per share (or $5.25 billion in aggregate).

Buffett’s warrants expire in 2021 and are exercisable for an additional aggregate cost of $5 billion, or $7.142857 per share. With shares just above $16.00 at this time, those warrants would be up theoretically by almost 125% — except that the cost basis when you include the 6% coupon ($300 million per year in income) is massively lower on a total return basis.

What Buffett did not say is that he got a deal by investing in the company that the public did not get. It was a sweetheart deal that was not as certain at the time, but it has been a great play for Buffett and Berkshire Hathaway. Quite simply, Buffett does not have to care if Moynihan keeps both the CEO and chairman title or if he just remains CEO. Buffett wins either way.

Bank of America shares were last seen up three cents at $16.20 in mid-afternoon trading on Wednesday. The 52-week trading range is $14.60 to $18.48, and the consensus analyst price target is $19.29.

ALSO READ: 6 Big Cap Banks Trading Under Book Value

By Jon C. Ogg


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