Warren Buffett’s belief in US banks is going to generate another $123 million more each year after companies including American Express and Wells Fargo passed the stress test from the Federal Reserve and were cleared to raise dividends.
Berkshire Hathaway, where Warren Buffett is the chief executive officer and CEO, has a much larger asset allocation among equity investments than businesses in any other industry. His company is the largest Wells Fargo and American Express shareholders.
Although the 83-year-old Buffett has continuously rejected the idea of offering a dividend at Omaha, Nebraska-based Berkshire Hathaway, he’s more than happy to take it from the businesses that he invests in, and he uses the funds to build up his own company. The payout increases highlight how some of the biggest Berkshire investments are now relying on Fed approval for their returns.
Increasing dividends “are probably something he was hoping for in the long-term,” said Buffett biographer Andrew Kirkpatrick. “Patience is the big lesson.”
The Federal Reserve is working hard to prevent any future tax bailouts like they did in 2008. They are evaluating banks’ management and capital. This gives banks the ability to announce their plans once the Fed evaluates how these businesses will survive in a hypothetical financial crisis. It’s noted that many of these financial institutions can pay dividends and still have a cushion to absorb any losses.
The largest home lender in the US, Wells Fargo, was able to increase its quarterly payout by $.05 to reach $.35 per share. That alone is going to give Berkshire Hathaway another $96.7 million more on its current 483.5 million shares that were disclosed in the annual report for 2013. Berkshire has been adding to their Wells Fargo stock for over 20 years.
American Express had the opportunity to raise its quarterly dividend price from $.23 per share to $.26 per share. Since Berkshire Hathaway owns 151.6 million shares, they will gain an extra $18.2 million per year from the dividend raise. They also own 96.1 million shares of U.S. Bancorp. This equates to an added $5.8 million per year now that the lender based out of Minneapolis raised their dividend from $.23 per share to 24.5 cents per share.
Berkshire Hathaway also has smaller stakes in M&T Bank Corp, New York Mellon Corp. and Goldman Sachs Group. M&T stated that they are not going to add to their $.70 per share dividend. Goldman Sachs has not announced any plans yet financially, and Bank of New York Mellon increased its dividend by 13%, and will add an extra $2 million per year to the ever-growing cash pile at Berkshire Hathaway.
Regulators do have the ability to turn down a higher payout plan if they do not feel the bank will be able to meet capital minimums, or if they notice weaknesses in governance, systems, planning or management. This happened already at five different firms, including Citigroup, which is the third-largest lender in the United States.
Bank of America Corp. and Goldman Sachs had capital plans approved after changes were made and they reduced their request for dividends and buybacks.
Back in 2011, Warren Buffett made a $5 billion investment in Bank of America. He received warrants to buy 700 million shares of the company at $7.14 apiece, and also received preferred stock. Because of this deal, the bank based out of Charlotte, North Carolina is now the fifth largest equity position owned by Berkshire Hathaway, “and one we value highly,” mentioned Buffett in his most recent annual letter to shareholders.
The second-largest lender in the United States by assets, Bank of America, raised its quarterly dividend from one cent per share to five cents per share. Amid the financial crisis during 2009, the company slashed its payout altogether.
Brian Moynihan, the 54-year-old CEO of Bank of America, is going to receive an additional $59,980 a year from the 599,878 shares that he owns. His stake in the company was disclosed in a regulatory filing, and it includes a family trust and retirement account.
Jamie Dimon, 58-year-old CEO of J.P. Morgan Chase, is also going to see a larger benefit from a dividend increase from the bank based out of New York. He’ll get an extra $473,000 per year from the 5.91 million shares that he owns, now that the firm was able to increase its dividend from two cents per share to $.40 per share.
Berkshire Hathaway’s Cash
All of these dividends will add to the cash pile at Berkshire Hathaway, which has swelled to a total of $48.2 billion as of the end of 2013. Over the last five decades, Buffett has wisely used the funds generated from operating units, insurers and investments in order to fuel the expansion of Berkshire Hathaway, and turn the company from a simple textile maker into a major powerhouse worth more than $300 billion.
The rising price of dividends is just one of the many ways that Warren Buffett benefits from the stocks that he buys, said Kilpatrick. In the last year alone, Wells Fargo shares have rallied 30%, and American Express has risen by 33%. Both of these companies beat the S&P 500 index, which over the last 12 months has gained 18%.
“You can have 20 years of patience, but if you’re in the wrong company, you may have made nothing on your investment,” said Kilpatrick. “You’ve just got to be right about the future of the business.”