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Should I Invest in General Electric (GE) | Complete Overview of General Electric

“GE is the symbol of American Business to the world” - Warren Buffett.

For years Warren Buffett sat on his pile of cash and waited. And waited. In the midst of this economic Pearl Harbor whilst everyone was running for the door, Mr Buffett invested $3 billion dollars in GE and $5 billion in Goldman Sachs in true Buffett style. Quick, decisive and opportunistic. Whilst critics have started judging our Omaha Guru based on short term movements in the share price, the master investor sits tight with his life-long investment horizons. He is a long term investor, and the lower prices go, the happier he gets.

• $5 billion preferred stocks in Goldman Sachs (NYSE: GS) : 23 September 2008. He gets a hefty 10% dividend, and receives warrants allowing him to buy $5 billion of common stock at $115 per share (Trading at$115 at the time of writing)
• $3 billion to General Electric, under terms similar to the Goldman Sachs deal - except that the preferred stock is callable for a 10% premium after three years. The warrants allow him to buy stock at $22.25 per share (trading at $11.35 at the time of writing).

For common stock holders, getting into GE at $22.25 is very different to Warren Buffett’s $22.25! He is getting 10% dividend for 5 years - thats a guaranteed 50% of his $3 billion back in 5 years (Five Warren Buffett years is probably equivalent of 6 months to an average investor) - effectively halving his purchase price. Add the “rights to buy stocks at the same price” up to $3 billion adds further value to his deal. That said, now that the share price of General Electric is half of what he paid for it 6 months ago, things are looking quite palatable even for common stockholders. Note the share price went to a low of $5.87 at its low. We would be very happy to get our hands on some <$10.00. Looking at the share registry, the CEO and directors were unloading their holdings at around $11-12 prior to the February crash, and topped up heavily at $6-7 on its way down.

In an interview with CNBC’s Becky Quick:

CNBC’s Becky Quick: MR. BUFFETT, THANK YOU FOR JOINING US.

Warren Buffett: I’M IN AN AIRPLANE AND I HOPE TO SEE — HOPE IT’S BEING POWERED BY GE ENGINES.

Quick: WHY INVEST IN GE NOW?

Buffett: I’VE FOLLOWED THE COMPANY FOR A VERY LONG TIME. I KNOW MANAGEMENT. WE BUY LOTS OF WIND TURBINES FROM THEM. FRANKLY, THESE MARKETS ARE OFFERING THESE OPPORTUNITIES THAT WERE NOT AVAILABLE SIX MONTHS AGO.

Quick: THE TERMS OF THIS DEAL VERY DIFFERENT FROM SOMEONE WHO WOULD BE BUYING COMMON STOCK.

Buffett: THIS DEAL IS PATTERNED VERY MUCH AFTER THE GOLDMAN SACHS DEAL.THE ONLY DIFFERENCE IS THAT THE PREFERRED IS NONCALLABLE FOR THREE YEARS.

Quick: DID YOU GO TO GE OR DID THEY COME TO YOU?

Buffett: THROUGH GOLDMAN SACHS, I WAS APPROACHED ON IT VERY RECENTLY AND SO GOLDMAN SACHS APPROACHED ME.

Quick: WHEN WE TALKED LAST WEEK ABOUT GOLDMAN SACHS, YOU SAID THE REASON YOU WERE DOING THAT DEAL IS BECAUSE YOU ASSUMED SOMETHING WOULD GET THROUGH CONGRESS. THAT PLAN RAN INTO A WALL THIS WEEK. ARE YOU STILL EXPECTING SOME SORT OF DEAL WILL BE MADE?

Buffett: THE CONGRESS WILL DO THE RIGHT THING WHEN THEY UNDERSTAND. THEY MAY GET SIDETRACKED AS THEY DID EARLIER THIS WEEK. THERE’S NO QUESTION ABOUT THE PATRIOTISM AND WILLINGNESS TO ACT IN THE INTEREST OF THE COUNTRY. IT WON’T BE 435 TO NOTHING, BUT I’M BETTING THEY’LL ACT RESPONSIBLY ON THIS. I HAVE EVERY EXPECTATION THEY WILL, BUT I’LL STILL FEEL BETTER AFTER THE VOTES HAVE BEEN COUNTED.

Quick: THE DEAL WITH GE TODAY AND GOLDMAN LAST WEEK, ARE THESE STILL GOOD DEALS IF NOTHING GETS THROUGH CONGRESS?

Buffett: NO. I THINK WE HAVE TERRIBLE, TERRIBLE PROBLEMS. I SAID TWO WEEKS AGO THAT IT WAS AN ECONOMIC PEARL HARBOR. TWO WEEKS LATER, WE’RE IN WORSE SHAPE BECAUSE YOU DON’T WANT TO DELAY WHEN THERE IS A NATIONAL EMERGENCY. I THINK THAT’S PROBABLY OBVIOUS TO A MAJORITY OF CONGRESS. I THINK WE’LL GET ACTION. IF WE DON’T, I WILL HAVE DONE SOME DUMB THINGS.

Quick: THE HOLDUPS OVER THE LAST COUPLE OF DAYS, HOW DAMAGING IS THAT TO THE UNITED STATES ECONOMY?

Buffett: IT HURTS. YOU’VE HAD AN ECONOMY THAT’S LIKE A GREAT ATHLETE THAT’S HAD A HEART ATTACK, CARDIAC ARREST, AND THE PARAMEDICS THAT HAVE COME, INSTEAD OF ARGUING WHO WAS AT FAULT, THE ATHLETES SHOULD HAVE BEEN CHECKING HIS BLOOD PRESSURE MORE CAREFULLY. THE IMPORTANT THING IS TO APPLY THE RESUSCITATOR. IT DOESN’T HELP SPENDING TIME WORRYING ABOUT WHO IS TO BLAME FOR THE PATIENT HAVING THE HEART ATTACK.

Quick: YOU KNOW, WE’VE HAD PEOPLE CALL IN BRINGING UP THIS QUESTION, IF THIS IS SUCH A GREAT DEAL FOR THE AMERICAN TAXPAYER, WHY ISN’T WARREN BUFFETT INVOLVED IN THAT AS WELL. WHAT DO YOU SAY TO THAT?

Buffett: I DON’T HAVE 700 BILLION. WE WOULD BUY AT MARKET PRICES, WE WOULD BUY THE MORTGAGE DEBT IOF WE HAD THE BORROWING CAPACITY OF THE GOVERNMENT. IF WE COULD DO THE DEAL THAT IS AVAILABLE TO THE UNITED STATES GOVERNMENT AND HAVE STAYING POWER, WE WOULD MAKE SIGNIFICANT MONEY. IF THEY BUY THE ASSETS AT MARKET PRICE, I WOULD LOVE TO HAVE 1% OF THE PROFIT OR LOSS THAT RESULTS FROM BUYING THESE ASSETS FROM TROUBLED FINANCIAL INSTITUTIONS.THEY’RE COMPETITION IN BUYING THESE IS A BUNCH OF HEDGE FUNDS AND THE GOVERNMENT WITH ITS BORROWING COSTS, IF THEY BUY THEM AT MARKET, THEY WILL REALIZE A SIGNIFICANT PROFIT OVER TIME. I WOULD LOVE TO HAVE ONE PERCENT OF THE ACTION. I CAN’T AFFORD ANY MORE THAN THAT. THE KEY IS BUYING AT MARKET PRICES.

Quick: ARE YOU SAYING THAT IF YOU COULD GET 1% OF THIS DEAL, YOU WOULD PUT UP YOUR MONEY?

Buffett: YES. IF THE U.S. TREASURY OFFERED ME THE CHANCE TO HAVE A 1% PARTICPATION IN THE PROFIT OR LOSS IN THE 700 BILLION THEY’LL SPEND AND IF THEY BUY THE ASSETS AT MARKET PRICES, I’D FEEL I HAVE A SWEET DEAL. I WOULD TAKE 1% OF THE DEAL.

Quick: THIS DEAL YOU DID TODAY –

Buffett: THE ASSETS ARE PRICED ATTRACTIVELY NOW, BECKY. THAT IS THE THEME THEY’RE CINCHED, BUT IF YOU BUY AT MARKET PRICES, IF YOU BUY WHAT MERRILL LYNCH SOLD AT 22 CENTS ON THE DOLLAR, YOU’RE VERY LIKELY TO MAKE MONEY.

Quick: HAVE YOU SPOKEN TO ANYONE ON CAPITOL HILL ABOUT JUST THAT?

Buffett: I’VE SPOKEN TO SOME PEOPLE, SURE.

Quick: AND YOU’VE TOLD THEM YOU’D BE INTERESTED IN TAKING 1%?

Buffett: I DON’T THINK IT’S VERY FEASIBLE, BUT IF IT WERE OFFERED TO ME AND THEY WOULD BUY THE ASSETS AT MARKET PRICE AND I HAD TREASURY FUNDING COSTS WHICH ARE VERY LOW, AND THE STAYING POWER OF THE TREASURY, WHICH IS INDEFINITE, YOU’RE GOING TO MAKE MONEY ON THEM.

Quick: WHAT DRAWS YOU TO GENERAL ELECTRIC AND WHAT GOT YOU INTO THIS DEAL?

Buffett: GENERAL ELECTRIC IS THE BACKBONE OF AMERICAN INDUSTRY. I KNOW JACK WELCH WELL FOR DECADES. THEY’VE GOT SOME MARVELOUS BUSINESSES. I’M SURE THEY HAVE SOME TROUBLES IN FINANCE, BUT THEY’VE BECOME TAINTED AS EVERY COMPANY THAT HAS TO BORROW MONEY ALL THE TIME. THEY’RE GOING TO BE AROUND FIVE OR TEN OR 100 YEARS FROM NOW. IF YOU BUY AT THE RIGHT TIME, YOU’LL PROBABLY MAKE SOME MONEY. THAT DOESN’T SAY ANYTHING ABOUT WHERE STOCKS WILL BE IN SIX MONTHS. I THINK I KNOW WHAT WILL HAPPEN IN FIVE OR TEN YEARS. I JUST DON’T KNOW WHAT WILL HAPPEN IN FIVE OR TEN MONTHS.

Quick: YOU TALKED FOR A LONG TIME ABOUT HOW YOU LIKED TO BUY THINGS YOU UNDERSTAND VERY WELL, THAT YOU SEE WELL, THINGS LIKE KRAFT, BUDWEISER, COCA-COLA, HOW DOES THIS FIT IN WITH THE REST OF YOUR PORTFOLIO?

Buffett: WE BOUGHT A LOT OF WIND TURBINES FROM GE. WE DO A LOT OF BUSINESS WITH GE. THEY TOUCH ALMOST ALL CORNERS OF THE AMERICAN ECONOMY. ALL CORNERS OF THE INTERNATIONAL ECONOMY. IT IS A BIG, POWERFUL COMPANY THAT WILL TAKE SOME LOSSES IN THEIR FINANCE OPERATION AND THAT’S PART OF THE GAME, BUT THEY’VE GOT STAYING POWER AND A LOT OF THE BUSINESSES WILL BE WORTH MORE MONEY FIVE OR TEN YEARS FROM NOW.

Quick: YOU’VE BEEN ON A SPENDING SPREE THIS YEAR. ANOTHER $3 BILLION ON THIS. IS THERE A POINT WHERE YOU SAY I’M NOT SPENDING ANYMORE OF MY CASH?

Buffett: WE WILL ALWAYS HAVE PLENTY OF CASH AROUND BERKSHIRE. I REGARD 10 BILLION AS A MINIMUM. I DO NOT WANT TO BE DEPENDENT ON THE KINDNESS OF STRANGERS IN THIS WORLD. I WILL CONSIDER THE SURPLUS CASH AT BERKSHIRE, BUT I WON’T GO BELOW A CERTAIN MINIMUM. I DON’T WANT TO COUNT ON BANKS LENDING ME MONEY. WE’LL ALWAYS KEEP 10 BILLION OF CONSOLIDATED CASH AROUND….I LIKE SPENDING.I LIKE INVESTING AND THE CHEAPER THINGS GET, THE BETTER I LIKE IT. THIS IS A GOOD PERIOD FOR US, ANYBODY — GO AHEAD.

Quick: GO AHEAD.

Buffett: WELL, AS LONG AS YOU DON’T BUY THINGS WITH BORROWED MONEY, IT’S A TERRIBLE MISTAKE TO USE BORROWED MONEY IN MY VIEW, BUT IF YOU HAVE THE CASH. IF I BOUGHT A FARM A YEAR AGO AT $2,000 AN ACRE AND I HAD THE CHANCE TO BUY THE FARM NEXT TO IT FOR $1,400 AN ACRE, I WOULD NOT PAY A LOT OF ATTENTION TO VARIOUS INDUSTRIES OR ANYTHING LIKE THAT. IF I LIKED THE INVESTMENT, I WOULD BUY MORE OF IT AND WE’RE GETTING A CHANCE TO BUY THINGS ON MORE ATTRACTIVE TERMS THAN WE COULD BUY THEM A YEAR OR TWO YEARS SO THAT’S WHERE WE’RE SPENDING OUR MONEY.

Quick: YOU’RE GETTING MORE ATTRACTIVE TERMS THAN YOU WOULD GET IF YOU WERE AN AVERAGE SHAREHOLDER WADING INTO THE MARKET.

Buffett: I THINK THAT’S TRUE.

Quick: PEOPLE LOOK AT YOU, WATCH WHAT YOU’VE DONE AND WONDER IF THEY SHOULD FOLLOW SUIT. WHAT WOULD YOU TELL SOMEBODY IF THEY ASKED YOU THAT?

Buffett: I WOULD LOOK AT SPECIFIC SECURITIES WE BUY. WHATEVER BUSINESS I THOUGHT I UNDERSTOOD WELL OR I FELT CONFIDENT ABOUT THE LONG TERM PROSPECTS, OR CONFIDENT ABOUT THE MANAGEMENT OR THE PRICE WAS ATTRACTIVE, I WOULD BUY IT, BUT NOT WITH BORROWED MONEY.

Quick: THAT’S THE KEY? NOT BORROWING MONEY…NOT LEVERAGING UP?

Buffett: YEAH. THERE’S NO WAY A SMART PERSON CAN GO BROKE EXPECT THROUGH BORROWED MONEY. ALL BORROWED MONEY DOES IS, IT MAY HELP YOU GET IT A LITTLE FASTER, BUT IT CAN HELP YOU GET POORER A WHOLE LOT  FASTER. YOU MAKE DECENT INVESTMENTS IN THINGS YOU UNDERSTAND AT ATTRACTIVE PRICES AND YOU’LL DO WELL OVER TIME.

Quick:  MR. BUFFETT, WE HAVE HEARD FROM PLENTY OF PEOPLE WHO HAVE WRITTEN US AND CALLED IT AND SAID THEY’RE AGAINST THIS RESCUE PLAN BECAUSE THEY THINK IT’S A BAILOUT FOR WALL STREET. YOU’VE COME OUT IN FAVOR, BUT HOW WOULD YOU EXPLAIN THIS TO THE AVERAGE AMERICAN WHO DOESN’T HAVE A LOT INVESTED IN THE STOCK MARKET. WHAT DO THEY HAVE AT STAKE?

Buffett: THERE IS NO QUESTION THIS IS A RESCUE PLAN, BUT IT’S A RESCUE PLAN FOR THE AMERICAN ECONOMY NOT WALL STREET. IF YOU LOOK ATT HE PEOPLE AT LEHMAN OR BEAR STEARNS OR AIG, THE SHAREHOLDERS HAVE GOTTEN KILLED AND A LOT OF THE PEOPLE ARE LOSING JOBS OR LOSING BONUSES AND ALL KIND OF THINGS. THIS IS DESIGNED TO HELP THE AMERICAN ECONOMY FROM GOING INTO THE ULTIMATE TAIL SPIN, BUT WHEN CREDIT IS FROZEN AND WHEN BANKS ARE UNWILLING TO LEND TO EACH OTHER AND 8% OF DEPOSITS IN AMERICAN BANKS HAVE BEEN MOVED — THESE ARE — THIS IS AN ECONOMIC PEARL HARBOR AND ONLY THE WHOLE WORLD WANTS TO DELEVERAGE.THE ONLY ENTITY IN THE WORLD THAT CAN LEVERAGE UP TO MATCH THAT FORCE IS THE U.S. TREASURY. THEY ARE NOT DOING THIS FOR WALLSTREET. THIS IS BEING DONE FOR THE AMERICAN ECONOMY.

Quick: IF YOU HAD ONE MESSAGE TO THE SENATORS WHO ARE GOING TO BE LIKELY VOTING TONIGHT ON THIS BILL?

Buffett: VOTE FOR WHAT’S IN THE INTEREST OF THE UNITED STATES CITIZENS AND I THINK A MAJORITY, A SUBSTANTIAL MAJORITY WILL COME OUT ON THE SIDE OF VOTING FOR IT.

Quick:  WE WANT TO THANK YOU VERY MUCH FOR YOUR TIME. WE APPRECIATE YOUR TIME AND HOPE TO TALK TO YOU AGAIN SOON.

Buffett: THE GE ENGINES ARE PERFORMING MAGNIFICENTLY ON THIS PLANE.

Quick: THAT’S GOOD TO KNOW. THANK YOU VERY MUCH, WARREN.

Looking further into GE’s financial statements, it is clear that it has been punished for the risks attached to GE Capital. The market is not factoring in all the other businesses in GE which have been operating profitably - they have exposure in commodities, infrastructure, utilities, entertainment and energy. The revenue from GE Capital makes up one third of its total revenue, whilst the profits from GE makes up less than a third.

To listen to the latest CEO quarterly presentation click here: Audio Webcast

The historical share price of General Electric from 1960-2009:

General Electric’s share price have gone from $50 to $5 (one tenth) since the collapse. Some argue that the DOW will never recover to its previous heights (not for a long long time at least) - and that this is similar to Japans crash in 1981; where three decades after the peak in the 80s, the index is still a fraction of the previous high. We looked into the historical share price of Toyota to study its recovery since the last collapse. It fell from $40 to $4 in 1981, but over the last two decades it went from $4 to $135! A great company will always recover. We feel that General Electric will be around 30 years from now, and it will not matter then whether one got in at $11.35 (current price) or $9.00.