A little over a year ago, with the financial sector in a steep nose-dive, Warren Buffett revealed that his corporation, Berkshire Hathaway (NYSE: BRKA) would invest $5 billion in the ailing Bank of America (NYSE: BAC). The company certainly needed help. In 2011 Bank of America stock tumbled by more than 30 percent in the month of August alone. The move by Buffett was meant to shore up support in a financial institution that has taken a beating on the market the past few years with rumors flying that it is capital poor and not likely to recuperate anytime soon. The day the revelation was made, shares in Bank of America, as well as those of financial entities Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) jumped sharply then fell flat by the close of market.
This is not the first time that Warren Buffett has invested in troubled corporations. Berkshire Hathaway gave Goldman Sachs (NYSE: GS) $5 billion and earned a solid 10 percent return for its assistance. His company also dropped $3 billion into General Electric (NYSE: GE) which also came with a tidy10 percent return. His yield on preferred stock of Bank of America will garner him at least six percent; not a bad payday. No doubt about it, Warren Buffett has an innate talent for capitalizing on weak points, especially when dealing with troubled financial entities.
So what does Buffett’s investment in Bank of America mean to common shareholders over a year later? Actually, the company is doing much better than expected. Mr. Buffett’s investment plainly affected not just Bank of America, but was a much needed jump start to the financial sector as a whole. Shares of Bank of America, which were trading at a low of under $3 are on an upward trend this year selling for over $11 now. BAC is also getting a lift from the housing sector. More people are buying homes so the mortgage business is revving up once again. Return on common stock will net nothing like the six percent that Buffett has earned for his preferred shares, but unexpectedly there will be a small yield on shareholder’s investments.
Reaching a settlement on the court case regarding the Merrill Lynch debacle has worked to the company’s advantage on the market. Because of myriad litigation risks and lost income as a result of them, investors had shied away from investing. As the legal woes have become less of an issue, the stock is looking more attractive to perspective investors. But still the company is finding the price of what must seem like never-ending lawsuits more costly as time goes by. BAC has put aside nearly $11.6 billion dollars to cover damages and litigation costs. That’s a pretty big reserve and it leaves us wondering how much they expect to have to pay out in further costs associated with lawsuits.
Analysts are mixed on Bank of America. Some call for a buy, some are neutral and others advise against investing in a company with so many issues, legal and otherwise. With the help of Warren Buffett, Bank of America has managed to keep its head above water but sadly this is nothing to cheer about. The stock is not outperforming, nor is the company really viable after hitting rock bottom not so long ago. Legal issues will continue to dog the company in the near-term. We can only hope for better management and a clearer direction.