Proof That Warren Buffett Loves General Electric Company?

It's not as clear-cut as you might think.

Feb 26, 2014 at 11:35AM

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.

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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
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has allowed us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Brian Stoffel owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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