Warren Buffett’s bet on U.S. banks will generate $123 million more a year after companies including Wells Fargo (WFC) & Co. and American Express Co. (AXP) passed the Federal Reserve stress tests and were cleared to lift dividends.
Berkshire Hathaway Inc. (BRK/A), where Buffett is chairman and chief executive officer, has a larger allocation to financial firms among its equity investments than any other industry. It is the biggest shareholder in San Francisco-based Wells Fargo and American Express, the No. 1 credit-card issuer by purchases.
While Buffett, 83, has rejected the idea of a dividend at Omaha, Nebraska-based Berkshire, he welcomes them from companies he invests in, using the funds to build up his own firm. The increased payouts highlight how returns from some of Buffett’s largest investments now rely on Fed approval.
Increasing dividends “are probably something he was hoping for in the long term,” Andrew Kilpatrick, a Buffett biographer, said by phone before yesterday’s announcements. “Patience is the big lesson.”
The firms announced capital plans after the Fed evaluated how they would fare in a hypothetical financial crisis and found they could pay dividends while still maintaining a cushion against losses. The regulator is working to avoid future taxpayer bailouts like those of 2008 by evaluating banks’ capital and management.
Wells Fargo, the largest U.S. home lender, increased its quarterly payout by 5 cents to 35 cents a share. That would give Berkshire $96.7 million more a year from its stake of 483.5 million shares disclosed in its 2013 annual report. Berkshire began accumulating the stock more than two decades ago.
AmEx raised its quarterly dividend to 26 cents a share from 23 cents. That gives Berkshire, which owns 151.6 million shares, $18.2 million more a year. Buffett’s firm holds 96.1 million shares of U.S. Bancorp (USB), and will get an extra $5.8 million a year after the Minneapolis-based lender raised its dividend to 24.5 cents from 23 cents.
Berkshire has smaller stakes in Goldman Sachs Group Inc. (GS), Bank of New York Mellon Corp. and M&T Bank Corp. (MTB) BNY Mellon’s 13 percent dividend increase will contribute about $2 million more a year to Berkshire’s cash pile. Goldman Sachs didn’t announce capital plans and Buffalo, New York-based M&T said today that it would leave its quarterly payout unchanged at 70 cents a share.
Regulators can turn down a plan for higher payouts if the company doesn’t meet capital minimums, or if the tests find weaknesses in management, planning, systems or governance. That happened at five firms, including Citigroup Inc., the third-largest U.S. lender.
Capital plans at Goldman Sachs and Bank of America Corp. were approved after the companies reduced their requests for buybacks and dividends.
Buffett made a $5 billion investment in Bank of America in 2011, receiving preferred stock and warrants to buy 700 million shares for $7.14 apiece. That effectively makes the Charlotte, North Carolina-based firm Berkshire’s fifth-largest equity position, “and one we value highly,” Buffett wrote in his annual letter to shareholders.
Bank of America, the second-largest U.S. lender by assets, boosted its quarterly dividend to 5 cents from 1 cent. It slashed the payout in 2009 amid the financial crisis.
Bank of America CEO Brian Moynihan, 54, will get an additional $95,980 a year from his 599,878 shares. The stake was disclosed in a regulatory filing and includes a retirement account and family trust.
JPMorgan Chase & Co. (JPM) CEO Jamie Dimon, 58, will see a bigger benefit from a dividend increase at his New York-based bank. Dimon will get about $473,000 more a year from his 5.91 million shares after the firm increased its dividend by 2 cents to 40 cents.
Dividends add to Berkshire’s cash pile, which swelled to $48.2 billion at the end of 2013. Buffett has used funds generated by his investments, insurers and operating units to fuel Berkshire’s expansion over the last five decades from a textile maker into a business valued at more than $300 billion.
Rising dividends are just one way Buffett benefits from his stock picks, Kilpatrick said. Wells Fargo has rallied 30 percent in the past year, and AmEx jumped 33 percent in New York trading. Both beat the Standard & Poor’s 500 Index, which gained 18 percent in the 12 months through yesterday.
“You can have 20 years of patience, but if you’re in the wrong company, you may have made nothing on your investment,” Kilpatrick said. “You’ve just got to be right about the future of the business.”
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