Shares of Warren Buffett's Berkshire Hathaway (BRK.A) - Get Report (BRK.B) - Get Report were up .44% to $247,500 in Monday morning trading as the market reacted to Dow Chemical's (DOW) - Get Report Friday announcement that it will convert the conglomerate's preferred stock stake in the company into common stock by the end of the year.
Berkshire Hathaway holds 3 million of the 4 million outstanding preferred shares in Dow - a $3 billion stake. Kuwait's sovereign wealth fund holds the remaining million shares.
The conversion will save the chemical giant around $162 million a year thanks to the lower cost of issuing common stock and paying its dividend to Buffett and Kuwait, RBC analyst Arun Viswanathan wrote in a research note circulated Monday. By converting the preferred shares, Dow is able to escape their 8.5% annual yield - a $340 million-per-year burden, he estimated
The flip side, of course, is that by converting the preferred shares, Dow stands to temporarily dilute its common stock. Buffett and Kuwait stand to receive 24.2 common shares for each preferred share at a rough conversion price of $41.32 per share. Dow estimated in a statement announcing the conversion that this will create about 96.8 million new shares of Dow common stock.
Removing the burden of the preferred shares may give Dow room to grow, Viswanathan argued. He raised his price target on the stock to $72 from $68 Monday.
"We argue the amount of dilution is minimal and Dow can apply the incremental cash savings to shareholder friendly areas including buybacks, debt paydown, or a higher dividend," Viswanathan wrote.
Shares of Dow were virtually flat Monday morning.