GE Is Regaining Ground

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In 2008, Warren Buffett bought $3 billion of General Electric (NYSE: GE  ) preferred stock through his investment vehicle Berkshire Hathaway, just over a week after making a similar investment in Goldman Sachs (NYSE: GS  ) . The investment had a 10% dividend and was redeemable within three years at a 10% premium. Just before the three years were up, GE has already announced its intention to buy back that preferred stock, along with the premium and the accrued dividend.

Let's dig deeper
What forced GE to privately issue preferred stock? GE Capital, the finance division of GE, was feeling the crunch during the financial crisis. The economic meltdown cost GE its top-notch AAA credit rating from S&P, forced the company to cut its dividend for the first time since 1938, and shut down the market for short-term loans that GE needed to access to pay off short-term obligations. To reassure investors about GE Capital's liquidity and inject confidence, GE needed to show that capital was still flowing easily for it. That's what led to the Warren Buffett deal. Recently, Bank of America (NYSE: BAC  ) signed a similar deal with Buffett.

Now what?
The buyback makes perfect sense for GE. The company made $11 billion in acquisitions last year and has $91 billion of cash on hand, with $13 billion kept for non-financial services. Not to mention tht when a buyback ensures that the company is saving $300 million in cash every year, why not go for it?

The company is seeing major improvements on the revenue front, especially in the energy sector. In the first half of the year, energy revenue grew by 9%. Though profit fell by 14%, that's expected to improve by the end of this year because of demand from turbine power generators, deals with the Navy, and the increase in electricity consumption management sales. GE is also venturing into new deals in developing countries like India and China to take advantage of their growing economies.

Foolish takeaway
Today, GE is trading at a price much less than where it was before the Great Recession in 2008. Yet the company is slowly gaining ground and getting its financials shored up. GE's growth rate from last decade may be past, but its rock-bottom valuation makes this one company to keep on your watchlist.

Fool contributor Abantika Chatterjee owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 01, 2011, at 11:33 AM, techy46 wrote:

    GE's being over sold with all industrials and is a real bargain here especially with the 4% dividend.

  • Report this Comment On October 03, 2011, at 6:56 AM, kariku wrote:

    Been watching GE for a while. Will probably push the trigger after this week's drop on Greece panic.

  • Report this Comment On October 03, 2011, at 12:03 PM, kdt34wqx wrote:

    This article is garbage. GE is withholding information on its exposure to European banks. Why do you think they accumulated a large cash position? They'll need every dollar of that (and a lot more) to make it through the present panic. The odds are GE will go down with the rest of the banks, probably by the end of the year. Goodby GE.

  • Report this Comment On October 03, 2011, at 12:15 PM, savant55 wrote:

    Why would anyone buy GE stock in the wake of their completely bilking the United States with first of all, millions of dollars in tax refunds and second of all, thousands of jobs overseas? Hmmmmm - no thank you!

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