Chasing Value: General Electric is screaming to me!

All that you say is wonderful. Now if you'll tell me GE will get a new CEO, I might be convinced. Until then, no way.

The really good news about Buffett's money in GE is that he hopefully will see through the smoke that's been blown at all of us- and he'll tell all of us. And that will be soon. Incidently, the money raised in the stock offering is probably about one days commercial paper maturity. Raybo

In at $25.00. Some stunning values out there. You gotta believe it's Oct. 1987 all over again.


Beltway Greg

C E O IS NEEDED!

Steer clear of GE for now because in a slowing economy GE Capital can take a big it. The banks are not alone when it comes to non-performing loans.
Buffetts deal with GE is at a guaranteed 10% return, which implies the amount of risk is high.

Comparisons to "last time they were at this price" seem meaningless to me. The market values revenues and earnings differently over time (based on whether bull or bear mkt and sentiment).

GE is having trouble with financing. Nobody knows how tough or easy financing will be next week or next month. Without a crystal ball, I'd wait for more clarity. GE could just as easily fall to $12 as rise to $48 from here. In fact if I had to place a bet, it would be $12 based on the trend.

Based on valuation ... who can value any company in today's market? You are making a bet that valuation will be ok because traditional sources of capital will return shortly. As yet, there is no sign that is the case.

Following Mr. Buffet doesn't always work. Remember he gets a minimum 10% return as long as GE doesn't go out of business. I'd take his deal anyday. But that's a long way from buying common stock on the open market.

GE at $22.00 per share and paying a 5.6% dividend is about as safe a
stock bet as one can find in today's market. No need to take an all-in plunge, but risking 10% of one's investable assets now for hefty rewards down the road seems preferable to subjecting oneself to the "woulda-coulda-shoulda" remorse that results from doing nothing when opportunity knocks. Should GE continue to drop, I would welcome the chance to purchase more stock at $18.00, $15.00, and certainly $12.00, but I doubt that short of another great depression the stock would reach that level. In any case, "playing the market" should be fun, so one's bankroll shouldn't include money needed for serious living expenses. End of sermon.

GE disappointed me with its deal with Warren Buffett. Everything is supposedly "fine" at GE according to the media yet GE must resort to obtaining the most expensive type of financing there is.... and that is issuing preferred stock!!!! with a 10% dividend no less. In my MBA program I was told that if a company has to issue preferred stock, that company is really having financing troubles. Despite GE's reassurances that everything was fine and they still have a AAA credit rating, what they did not say was the real truth. If they still have AAA credit then they should borrow the money, You don't issue 10% preferred stock when you can borrow cheaper. The 10% dividend is paid after taxes, the interest on AAA debt is paid before taxes. I would guess you can currently borrow far cheaper than 10% today with a AAA rating. My guess is that GE can't borrow anymore. Needless to say the market order to sell my remaining GE stock went in right after I read the news.

Why weren't the current shareholders offered preferred stock at 10% before Buffett was? I'm sure plenty of investors would have loved to get the same deal that Buffett got. Anyway the stock really tanked the next day as the reality of the situation set in. If GE needed to conserve cash they could have stopped buying billions in stock back when the price was 50% higher than now and also cut the dividend. If they still had a real AAA credit rating, they should have borrowed it. GE doesn't want to be transparent here since the truth would spook the investors and cause further selling pressure on the stock, and that of course is against the motto of increasing shareholder value.
Was it better to dilute the shareholder value with Buffett's sweat deal, or to reduce or suspend the dividend to conserve cash?

Why should I borrow money at 10% after tax so I can continue to pay a 5.75% dividend? GE pays out over $3 billion in dividends a quarter (http://finance.yahoo.com/q/cf?s=GE) and they bought about $12 in stock in the last year. Hello, they have enough cash flow. Why dilute the shareholders value with the Buffett thing?

So what GE borrowed from Buffett goes up in smoke in one quarter in dividends. What happens in 6 months after all of Buffett's money is blown out in maintaining dividend payments? Will they go back to the trough to get more?

Just wait for GE to drop another 50% in price and if she is still paying the dividend, then you can make the 10% return that Buffett is guaranteed to make!

Has GE slipped in the US consumer borrowing mentality now?

Basically GE is willing to pay 10%+ interest on the money need to maintain one dividend payment.....How many GE shareholders would take a suspension of one dividend payment, and have that compound at 10% in return?

Scott,

You raise some great points. However, it is purely a guessing game as to the exact entry point for acquiring some GE stock. To paraphrase my pal Warren, one more time; ...'better to buy a great stock at a fair price then a fair stock at a great price.'

If GE drops much I will buy more.

Most likely GE will bottom with the rest of the market. Given that
1. the 2001-2003 bear market lasted over 2 years
2. the situation here is worse than the Tech bubble of 2000
3. we are only one year in this bear market
there is not reason to me to be buying into the market right now. I want to keep my powder dry. It takes a couple quarters of disappointing earnings to really put the bear market in full swing. GE lost 63% in the 2001-2003 bear market. Its down about 49% from its peak in October 2007.

26 will be a resistance point for quite some time. You sell into 26 for a trading profit. Just like selling at 30 in Jul/Aug was also a good trade. I sold most of my position into 29.50 since that was an obvious resistance line.

In any case GE will resist the short sellers with its high dividend yield, if people are ever allowed to short it again.

I'm not a finance guy but I believe GE has been overvalued going back to the Jack Welch era and Jeff Immelt bears no fault for the current slump. With GE's significant financial operations a fair historical valuation should be in the line of 12-15 times earnings.

I spent 5 years at GE and have to disagree with those calling for a new CEO. I do believe, however, that GE should take a lead in reforming US corporate culture, which I wrote about on my blog at http://wwelvaert.wordpress.com/2008/10/25/the-end-of-supply-side-economics/

GE has fantastic engineering, technical expertise and global reach. Their challenge is to get past the metrics-driven culture of Jack Welch and into their real assets: human capital.