When Warren Buffett invests in companies, markets almost always interpret it as a great vote of confidence. But isn't it an even more positive signal when those same companies, returned to health and flush with abundant profits, pay him back? If so, then investors might want to use the latest return of Mr. Buffett's mid-crisis life-raft funds to reflect on just how much better off the U.S. financial system has become.
General Electric officially notified Berkshire Hathaway on Tuesday it intends next month to repurchase the $3-billion (U.S.) of preferred stock it sold him in October, 2008. GE has flagged the move for a while. Under terms of the deal it struck with Mr. Buffett when all hell was breaking loose, the company led by Jeff Immelt was obliged to wait three years to call the preferreds. It also needed to give at least 30 days' notice – hence this week's letter from Fairfield, Conn., to Omaha, Neb.
Mr. Buffett's money doesn't come cheap, so it's logical that GE, like Goldman Sachs before it, would seek to exit the deal as soon as possible. The perpetual preferred stock carries a dividend of 10 per cent and can be repurchased at a 10-per-cent premium. Berkshire also received warrants to buy $3-billion of common stock at $22.25 a share within the next five years. With GE stock around $15, they're currently out of the money.
But that shouldn't diminish the positives to be gleaned from GE's payback. The company's financial position is much stronger. The group holds some $90-billion of cash to deal with any blips in refinancing the medium-term debt it took on during the crisis; halved its dependence on the short-term commercial paper market; and has nearly reached a goal of whittling down its finance arm's balance sheet to $440-billion.
True, many U.S. banks are still wobbling, thanks to mortgage and European debt woes. But even with all these troubles, Mr. Buffett only secured a 6-per-cent dividend, and 5-per-cent repurchase premium, on his $5-billion investment in Bank of America last month. That, combined with GE handing back Mr. Buffett's money, marks progress, however slow and grinding it may feel.