Here’s How Warren Buffett Could Lose a Major Cash Cow as Dow Chemical Rallies
While most shareholders have cheered as shares of Dow Chemical soared 37% over the past year on news of a potential merger between itself and Dupont, the Oracle of Omaha must be feeling a bit tense.
That’s because in recent weeks, shares of the giant chemicals maker have been flirting with a precise $53.72 line—putting in danger an investment that earns Warren Buffett $8 per second, the Wall Street Journal reported.
The famed investor has been collecting roughly $225 million a year (or $8 a second) in interest from his Dow Chemical stake since 2009. That year, Buffett provided Dow with $3 billion to help finance its purchase of chemical maker Rohm and Haas. As part of the agreement, the industrials giant gave the investor preferred stock and slapped on a hefty 8.5% annual payment on top of it.
But the contract came with a back door for Dow. Starting in April 2014, should shares of Dow Chemical close above $53.72 for 20 days in any consecutive 30-day trading period, Dow can convert Buffett’s preferred shares into common stock—canceling the Oracle’s $8-a-second payout. Each of Dow’s common shares pay a mere 3.4% annual regular dividend, so it’s of little surprise that Dow Chemical has indicated that it fully intends to convert Buffett’s stake should the conditions be met.
On his end, Buffett has said he would not own shares of Dow Chemical if his stake were converted into common stock. Berkshire reported in 2014 that its preferred stock would convert into 72.6 million common shares, and Buffett would still earn over $900 million if he were to convert his stake to common stock and sell it at a cent above the agreement’s $53.72 threshold. But such a sudden sale doesn’t particularly fit with the investor’s buy-and-hold style.
Shares of Dow Chemical opened at $53.65 on Thursday.
It’s not the first time shares of Dow Chemical have come close to or passed the $53.72 line. When news of a potential merger between Dupont and Dow first broke in December, shares of Dow reached nearly $57. But they retreated back below the magic number before the 20-day minimum was met.
When asked whether the firm was shorting Dow stock in the hopes of keeping the stock’s price below $53.72, Berkshire Hathaway declined to comment to the Journal.
Fortune has reached out to Berkshire, and will update should they respond.