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.