Redeeming Buffett’s GE Preferred Doesn’t Mean Buffett Is Out of GE

Investors are used to following Warren Buffett and his Berkshire Hathaway (BRK.A) in and out of companies, picking up fractions of the wealth that often comes from the great guru’s stock picks. But here’s a case where his cash out might signal a good time to buy.

General Electric (GE) will write Buffett a $3.3 billion check Oct. 17 to redeem the preferred shares he bought in 2008. Buffett will get his principal and a $300 million bonus, a sweet reward required in the conditions he set for propping up the giant when its outlook was particularly grim.

Buffett has said before that he wouldn’t welcome this kind of early payoff. He seems to have few reservations about GE’s long-term success, and unlike GE’s long-suffering common shareholders, he was getting paid a 10% annual dividend to wait out a recovery. But he has little choice but to take his billions home now.

Meanwhile, investors who followed Buffett’s into GE in 2008 get no such severance. GE’s common shares are down almost 20% from since October 2008, and they’ve mostly been stuck in a trading range of $15 to $20 for the past two years.

General Electric Company Price Stock Chart by YCharts

GE’s decision to pay back Buffett is supposed to signal a new dawn for the 121-year-old, $170.43 billion company. It means the balance sheet is strong, and management doesn’t see any disasters on the horizon that would require the Buffett billions. YCharts Pro rates the company’s shares as attractive and undervalued. If GE’s business units can capitalize on its newfound health, it’s a good time to buy the shares.

GE’s most shining business at the moment is the one that got it in such trouble three years ago. GE Capital wrote too many subprime loans, and GE has been cutting down this unit in size and risk levels for three years now. That strategy, which includes limiting GE’s overall exposure to the financial sector, has paid off big. The financial services division was by far the company’s largest contributor to its five consecutive quarters of double-digit earnings growth recently.

General Electric Company Net Income (TTM) Stock Chart by YCharts

Mistakes here may yet come back to bite GE. The U.S. government is suing GE Capital and 17 mortgage lenders for selling their horrible housing loans to Freddie Mac and Fannie Mae years ago. That liability probably will appear in GE’s risk factors for years.

Otherwise, GE has built engines for about half the planes on earth today, as well as transmission devices and equipment in the energy sector. Both of these divisions have been slow to recover. But new GE plane engines were a big hit at an important industry show recently, and the last quarterly report showed orders in its infrastructure division up 24%. The company’s predicting recovery in its energy businesses this year, and sales in the healthcare business (high tech equipment) have been strong for awhile.

There’s a good chance that GE will see a spike in its share price when GE Capital starts paying it a dividend again. That requires regulatory approval, which the company could get late this year or early 2012. Investors expect the company to pass it on through as a dividend hike to shareholders, many of whom suffered through the nearly 68% dividend cut in 2008. GE is on YCharts Pro's list of popular hedge fund stocks.

For now, though, GE shares still sell for about two-thirds of the valuation that was typical of the company before the recession, and GE’s market cap is a shadow of its former $400 billion-plus self.

General Electric Company PE Ratio Stock Chart by YCharts

By the way, Buffett hasn’t exactly exited the company. At last check, Buffett still owned about 7.8 million GE common shares.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.