Buffett Buys GE, Goldman: Should You Follow? 14 comments
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While I was sitting at my desk on Wednesday, I heard Chris Rowe marvel, “Warren Buffett is such a stud.” Now, Chris does have a slight man-crush on Warren, but he’s also happily married with baby number two on the way. So I figured that Buffett must have just pulled off a major coup.
Sure enough, I looked at the news and saw that Buffett’s Berkshire Hathaway (BRK.A) had invested $3 billion in General Electric (GE) preferred stock carrying a 10% dividend. Buffett also secured the option of picking up another $3 billion worth of GE common stock at $22.25 a share over the next five years. GE stock closed at $24.50 on Oct. 1. For average Joe investor, GE’s dividend yield is around 5%.
The GE deal was Buffett’s second major move in the span of two weeks. On Sept. 23, Buffett agreed to buy $5 billion worth of Goldman Sachs (GS) preferred stock with a 10% dividend – way better than the 1% dividend yield for the common stock. And just like the GE deal (you think GE was taking notes?), Buffett can double down over the next five years by purchasing $5 billion of GS common stock at $115 per share. Goldman shares closed at $125.05 on Sept. 23.
Top officials at both firms also agreed not to sell any of the hundreds of millions of shares of their respective companies for the next three years with the exception of charitable contributions.
The dividend payments alone work out to an annual paycheck of $800 million for Berkshire Hathaway.
Clearly, Buffett thinks that bargains are aplenty in the current market. "Frankly, these markets are offering opportunities that weren't available six months or a year ago," Buffett told CNBC. "So we're putting money to work."
Buffett’s timing isn’t always perfect, though. Berkshire has held 7.78 million shares of GE since the first quarter of 2006. At the time, the shares were worth $270 billion. Now, they are valued at $190 billion as of Oct. 1 – down 42% over the past two years.
In the past year, GE’s stock has dropped a whopping 47%. Its stock has not traded this low in over 5 years.
And Buffett acknowledged to CNBC that if Congress doesn't approve the bailout plan soon, then "I will have done some dumb things."
Nevertheless, Buffett doesn’t see the bailout plan as a magical cure for the economy. In an interview on “The Charlie Rose Show,” Buffett warned that the economy will face hard times for a while longer.
"This really is an economic Pearl Harbor," Buffett remarked. "That sounds melodramatic, but I've never used that phrase before. And this really is one."
"The recession is going to get worse," Buffett said. "I don't want to hold out false hopes that -- by some magic bullet -- that things will turn around in a couple months."
So I asked Chris what he thought about both GE and Goldman as long-term buys. Remember, the average investor isn’t going to get a 10% dividend to hold onto these stocks.
Chris’ verdict: Wait. “I wouldn’t do the regular stock purchase for the long term,” answered Chris. “Not yet, anyway. This bear market is likely not over. It’s not time to buy yet.”
Would he take the same deal Buffett did? “In a heartbeat,” said Chris.
That’s why Warren Buffett is such a stud.
What do you think about Buffett's deal with GE and Goldman? Do you think the common stock of either is a good buy right now? Leave your comments below.
Disclosure: none
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This article has 14 comments:
You know what I care about? When I go into a hospital and see GE medical imaging machinery being used exclusively. Not mostly, exclusively. What I care about is buying GE lightbulbs not Philips. I can't light my house with commercial paper. I can't do an ultrasound with short term financing. Those are instruments. GE manufactures goods and has market share. Remember those words? Goods? Markets? You know, things that are sold to people as opposed to ficticious instruments negotiated between financial organizations which are similarly ficticious?
Forget it, its a long term thing, you wouldn't understand. Potash is due for a bounce, though. I'm sure you bought it already.
1. Understandable => "things I can understand"
2. Sust.Comp.Advantage => "fundamentally good economics"
3. Able n Trustworthy Managers => "a management that I like and trust and admire"
4. Bargain Price => "it's got to be a price that makes sense"
Charlie Rose: Is there an operative narrative to the kinds of investments you are making other than you look at and you buy on value, look at advantage, management, you look at a place that can absorbed the amount of money you want to invest, and you look at its prospects, and you look at price.
Warren Buffett: Yeah. They have to be pretty good size for us now to have... to move the needle. But we look for fairly large situations.
We look for things I can understand. A lot of businesses I don't understand. So some guy may know how to make money in cocoa beans, but I don't so I just let him have that. But it's got to be something I understand. It's got to be a business with fundamentally good economics. It's got to be a management that I like and trust and admire. And it's got to be a price that makes sense. And lately the price --
Charlie Rose: Prices make sense.
Warren Buffett: Prices make a lot more sense now, yeah.
If you see GE in such a poor position, how do you explain the AAA credit rating? Don't you think the analysts have thouroughly investigated GE's financial arm? Please help me understand your position on GE.
Lets imagine you were working out at the Wall Street New York Sports Club with a cut on the sole of your foot. You walk across the shower floor and later develop an antibiotic resistant strain of stapholoccus (MRSA). It gets worse and worse. You get really sick and you have to go to the hospital.
The doctor comes in and says: Listen tough guy, you're done. Eventually that MRSA is going to work its way up your leg and kill you. I could amputate your foot but why bother?
My guess is that you would argue to your doctor that you could enjoy another 40 years of your life without your foot and that given a rusty hacksaw, you would do the job yourself.
Now, if you were an enormous foot, that's a different story.
1. GE's annual report tells us that the company is strategically positioned around the world. OK so they are positive that they are strategically positioned around the world and yet earlier this year Imelt or Omlet as I like to call him couldn't even get their earnings right in pre-release statements and sent the share price down 16% in ONE day.
2. NBC has failed to keep up with Fox news in the ratings. To figure out why I took a look at their news coverage and what do you know. The chearleading for Obama going on on that network will alienate all but the far left for years to come. If you don't believe me try listening to Keith Oberman for 5 minutes with an open mind to the center and right's points of view. I wrote to them to complain and had the privileged of receiving a form letter and I started seeing more of Oberman than ever before. So sadly I have have and unrealized loss of 6K on GE stock and I watch Foxnews because not even when it is in my own economic self interest can I bring myself to tolerate even 5 minutes of Obermans smugness.
3. GE bought back Billions of dollars worth of shares in the high 30's and has now issued 12 Billion dollars worth of common and up to 6 Billion worth of preferred at the low 20's mark. So basically the company has squandered billions worth of capital that would have served the shareholders more had it been dispersed in dividends and now Buffet is being paid to take the risk while the common shareholders have been diluted. Keep in mind that the dividends paid on these new issues will be weighing on earnings for the duration of there existence as will the $4 to $1 debt ratio the company has to finance and pay interest on.
4. With the debt that the company is carrying and the credit market frozen you would think that the liquidity received from recent offerings would be a boon and would be kept for the time being to insure that AAA credit rating on GE capital and yet Omlets press release mentions only the potential acquisitions that GE could make with this money. Yes we have seen how competent thay have been at capital allocation so far.
In the end I have no one to blame for my investment but myself but I would urge anyone thinking about investing in GE to think about whether GE is really looking out for its shareholders given my experience with them so far.
1. The have a large financial business that is hurting as are the rest of the financials. I just read Charles Morris's book, 'The Trillion Dollar Meltdown' and discovered that GE was a pioneer in creating Asset Backed Securities to finance numerous things the company needs. According to Charles this lowers apparent debt using special purpose entities. An ABS is a type of CDO. The company is obviously desperate enough to give Buffet a 10% guaranteed dividend to raise some capital. Now there are questions about whether GE can get another $85 billion they need the next time their short-term commercial paper comes due. Its hard to imagine that a great company like GE would have problems getting that loan but credit markets are frozen and need time to thaw.
2. GE has been a proxy for the economy and the economy doesn't look good going forward. All of the analysts that I listen to say the earnings outlook for the entire market is going to turn pretty ugly as numbers are released this quarter. Estimates are starting to be cut at a breakneck pace. And GE is a bellweather.
With the short ban being lifted last night and earnings for GE out tomorrow, look out below. This is a rare instance that I would consider buying put options on a company but I just did. Will buy some more on any bounce.
The fed is backstopping top rated commercial paper right now which should help GE. However, the downturn in earnings could be a real problem for them going forward and perhaps threaten their AAA credit rating at some point. I have to believe thats what they are worried about most and what prompted them to give Buffet the sweetheart deal.