Proof That Warren Buffett Loves General Electric Company?

Warren Buffett is considered by many to be the hands-down greatest-ever investor. So when Warren Buffett makes big moves, investors are wise to at least investigate them.

During the fourth quarter of last year, Buffett increased his holdings of General Electric (NYSE: GE  ) by 1,700% through his Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) holding company. That equates to about 10.6 million shares and roughly $265 million before even considering dividends.

Read below to find out why Buffett may have made such a drastic move in his GE holdings -- and whether you should consider doing the same.

Source: Wikimedia Commons.

Believe it or not, Buffett didn't have to go out on the open market and buy the roughly 10 million shares he amassed last quarter. There's a little bit of a story to how things got to be the way they are today.

It actually started back in 2008. As you might remember, the financial sector was crumbling, and many of America's most iconic companies looked like they might disappear overnight. That's when Buffett stepped up and penned an editorial for The New York Times titled: "Buy American. I Am."

In it, he acknowledged that buying companies with failing models or that were leveraged to the hilt was unwise. "But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now," Buffett predicted.

General Electric Company, it turns out, was one such company Buffett believed in. That's why, back in 2008, he bought $3 billion in perpetual preferred stock. The stock carried a hefty 10% annual dividend -- which equated to roughly $900 million in profit for the company over three years. When GE bought the stock back from Buffett a few years back, it paid $3.3 billion for it -- meaning Berkshire was able to claim about a $1.2 billion windfall in total from its investment.

An additional caveat to the deal was that Buffett had the option to buy common stock by October of 2013 for a strike price of $22.25. After executing a net share settlement, Buffett received an additional $260 million in shares of GE's common stock.

Does this mean Buffett believes in the company? It's hard to say. It certainly raised eyebrows in some circles when Berkshire revealed that it hadn't sold its 10 million-plus shares of General Electric before the end of the year. At the same time, Buffett had the opportunity to buy back as much as $3 billion in GE stock at the strike price, but decided not to.

How should you move forward?
Overall, Buffett's decision should really be a non-issue. If you believe in following his path, Buffett's actions are pretty noncommittal. But if you're evaluating the investment on its own merits and how it fits with your own investment plan -- which is much more Foolish than blindly following Buffett -- there's a lot to investigate.

Probably the most important thing to take note of is the fact that GE is spinning off its North American consumer-lending portion of GE Capital. It was GE Capital that did so fantastically well for the company in the years leading up to the Great Recession, and it was GE Capital that also lost so much money after the Recession.

In any case, the business was deemed a distraction by management, and the decision to slowly divest GE Capital and focus on its primary business of infrastructure is likely one that will pay off in the long run. Add in a 3.5% dividend yield, and it's easy to see why GE could be a good investment for you -- no matter what Buffett thinks.

Learn from Buffett and apply to your own situation
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  • Report this Comment On February 26, 2014, at 6:12 PM, shoemaker17 wrote:

    Just over a quarter of a billion dollars worth of GE stock? MOTHER OF GOD. Drastic indeed...

  • Report this Comment On February 27, 2014, at 1:06 PM, pondee619 wrote:

    " After executing a net share settlement, Buffett received an additional $260 million in shares of GE's common stock."

    Am I correct to read this as Buffet/Berkshire to have received $260 million in shares at no cost? Giving up the warrants ot buy $3 billion worth for the $260 million worth he received?

    So, for lending GE $3 billion for 5 years, Berkshire got back $4.2 billion (a $1.2 billion prifit) and $240 million in GE stock. Is that a 48% (and counting) return over those 5 years?

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