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Buffett Exercises Bank of America Warrants as Dividends Start to Rain

- By Holly LaFon

After reminding readers every year in his letter that Bank of America constituted his tacit second-largest holding because he could at any time exercise a stash of warrants, Buffett said on Friday that he would convert them soon, making him the bank's largest shareholder.

Buffett's decision comes on the heels of an announcement that the bank would boost its dividend by 60% to 12 per share starting in the upcoming quarter. Bank of America had slashed its dividend to one cent in early 2009 during the financial crisis from 64 cents six months prior and had raised it to 7.5 cents since.

The bank received approval to boost its dividend and repurchase shares after passing a second round of the Dodd-Frank stress tests from the Federal Reserve on Wednesday. The Federal Reserve approved all 34 participating bank holding companies, which represent more than 75% of all domestic bank holding companies' assets.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized," Federal Reserve Board Governor Jerome H. Powell said.

Passing the tests convinced the Fed that the banks' high capital levels would enable them to withstand a severe recession, clearing them to begin returning more money to shareholders. So far, Citi (NYSE:C) has also raised its dividend, and 12 more are expected to increase their dividends after the release of the results. Other banks tested included Wells Fargo (WFC), Bank of New York (BK) and JPMorgan Chase (JPM).

Buffett snagged the warrants to purchase 700 million in shares at an exercise price of $7.14 when the bank desperately needed a cash infusion in 2011, paying $5 billion. At a share price round $24 Friday, Buffett received $16.8 billion on the warrants, netting Berkshire Hathaway (BRK-A)(BRK-B) a profit of $12 billion on the deal.

See Warren Buffett (Trades, Portfolio)'s portfolio here.

This article first appeared on GuruFocus.