In 2008, Warren Buffett bought $3 billion of General Electric (NYS: GE) preferred stock through his investment vehicle Berkshire Hathaway, just over a week after making a similar investment in Goldman Sachs (NYS: 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.
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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 (NYS: BAC) signed a similar deal with Buffett.
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.
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.
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