Sale of GE Capital Assets Will Strengthen Global Leadership in Core Industrial Segment, Boost Shareholder Dividends & Buybacks, Strengthen Balance Sheet and Boost Share Price
GE Capital exit will increase asset allocation to high-growth industrial segments
4.5% increase in quarterly dividends; $50 billion buyback will enhance equity returns
14% growth in industrial segment operating earnings signals growth potential
General Electric Company (NYSE: GE) is a globally diversified industrial and financial services company with $148.6 billion in annual revenues and customers in over 175 countries. Through seven business segments, General Electric produces aircraft engines, electric motors, energy, gas, oil, lighting products, software and turbines. The company focuses on Aviation, Energy Management, Healthcare, Appliances & Lighting, Oil & Gas, Power & Water and Transportation. In addition, General Electric offers commercial and personal financial services through its GE Capital unit. General Electric was founded in 1892 and has paid dividends since 1899, and has grown into an industrial giant with a market capitalization of $274 billion.
April 10, 2015: General Electric Announces Restructuring Plan to Exit Lending Business and Focus on Industrials
General Electric plans to dismantle its GE Capital business segment to focus on its core industrials segment. GE Capital provides financial services such as commercial and personal loans, credit cards and fleet management, and owns a large portfolio of real estate properties.
The 2008 financial crisis hurt the company’s stock price due to financial risks associated with GE Capital, and impacted GE’s balance sheet and available cash, thereby impacting overall credit and core business investments.
Under the exit plan, General Electric will sell its real estate assets to global bank Wells Fargo (WFC) and private equity firm Blackstone Group (BX) for $23 billion and to another unnamed buyer for $3.5 billion. Additionally, the company will sell a majority of its commercial lending, leasing and related consumer platforms in the United States and abroad, for approximately $200 billion. General Electric plans to retain some financing capabilities such as leasing to aircraft companies or providing loans for energy and health care companies.
The trimmed down GE Capital will no longer be designated as a systemically important financial institution and lower GE’s level of regulatory scrutiny. General Electric’s first quarter earnings will be reduced by an after-tax charge of $16 billion related to the disposition of GE Capital assets.
After the disposition, by FY 2018, industrials will contribute about 90% of earnings, up from 58% in 2014. The new General Electric will focus on energy, healthcare, aviation, oil and gas, and power and water technologies.
Shares Jump On Announcement
After the GE Capital announcement on April 10, 2015, shares climbed as high as $28.68, ultimately settling up 11% at $28.51 per share. As of market close on April 17, 2015, General Electric shares were at $27.25, up 6% since the announcement and up 8% year-to-date. With shares trading at $27.25, General Electric has a market capitalization of $274.27 billion and a price-to-earnings ratio of 18.18x on earnings of $1.50 per share.
Swiss financial firm UBS maintained a Buy rating and increased the share price target of General Electric from $30 to $32 on realization of greater asset value and reduced systemic risk related to the company’s exit of GE Capital. Asset management firm AllianceBernstein Holding (AB) increased its share price target for General Electric from $30 to $33. According to UBS and AllianceBernstein, General Electric shares have 12-month upside potential of about 17% and about 21%, respectively, at a closing price of $27.25. Investment firm Morgan Stanley (MS) rated the company’s shares with an Equal-weight rating in response to a revised GE Capital being equity-friendly over the long term.
$50 Billion Buyback Program
General Electric recently approved a $50 billion share buyback program, the second largest share buyback program in history. General Electric also holds the record for the fifth largest share buyback when it authorized $35 billion in December 2012.
4.5% Increase in 2015 Quarterly Dividend to $0.23 Per Share
General Electric’s Board approved a second quarter dividend of $0.23 per share, annualized at $0.92, to be paid on April 27, 2015, and up 4.5% from $0.22 per share in 2014. General Electric shares now offer a 3.70% dividend yield. The company paid $9.24 billion in dividends in FY 2014. General Electric has paid quarterly dividends since 1899 and only decreased dividends twice in its century-long history. Since lowering its dividend to $0.10 per share in 2008, General Electric has grown dividends at a 15% annual rate.
Management aims to return up to $90 billion to shareholders through share repurchases and dividends by 2018.
ROBUST PERFORMANCE, GLOBAL GROWTH PROSPECTS IN TOP UNITS
GE Aviation Had Q1 2015 Revenues of $5.67 billion with Increased Orders for Engines
GE’s Aviation unit is a leading provider of jet engines and engines for commercial, marine, military, turboprop and shaft uses. As an efficient operator, GE Aviation has Capability Maturity Model Integration Level 3 (CMMI-3) appraisal on all its products and software.
Combined, GE Power & Water and GE Energy Management Had $7.4 Billion in Q1 Revenue
GE Power & Water produces turbines, generators and nuclear reactors. The unit recently signed a $1.7 billion deal to supply 46 turbines to Egypt to boost power generating capacity by 10% to meet increasing electricity demand, with plans to spend over $1 billion more on power generation equipment. GE Power & Water expects to sell over 500 gas turbines to Japan, the United Kingdom, Brazil, South Korea, France, Russia, Germany Turkey, Argentina and Egypt by 2030.
To meet growing demand, General Electric plans to invest $200 million to construct a new manufacturing and engineering center in Egypt. The multimodal center will offer a diverse set of products for industries such as power generation, renewables, water, oil, gas, aviation and rail transportation. General Electric plans to hire up to 500 employees from the region.
GE Energy Management designs and manufactures electrical power solutions that deliver, manage and convert energy. GE Energy recently entered into an agreement with Scottish energy provider SSE PLC to acquire the Langhope Rig wind farm in Hawick, Scotland. The wind farm is comprised of ten 1.6-megawatt wind turbines that will be operated and maintained by the company’s UK energy unit. GE Energy has committed to investing over $1 billion in renewable energy projects globally.
General Electric Will Control 50% of Heavy-Duty Turbine Market with Alstom Acquisition
General Electric’s $13.15 billion acquisition of the power equipment business of French energy company Alstom is currently under investigation by the European Commission. Management is confident the company will receive approval on the deal based on favorable decisions on over 50 such deals in the region. The Commission voiced concerns about the acquisition decreasing competition in the heavy-duty turbine industry which could cause a jump in prices. If the acquisition is approved, General Electric would control about 50% of the worldwide market for turbines outside of China. The only other companies that produce heavy-duty turbines are German engineering company Siemens AG and Japanese energy company Mitsubishi Hitachi Power Systems. General Electric agreed to extend the deadline for a decision from July 8 to August 6, 2015.
Bioprocess Revenues Up Over 26% At GE Healthcare
GE Healthcare focuses on developing healthcare solutions including medical imaging, X-ray machines, CT scanners and ultrasound machines. GE Healthcare announced a new research-based collaboration with molecular diagnostics company Veracyte Inc (VCYT) to develop products to more efficiently diagnose diseases. While no financial details were released, both companies aim to reduce healthcare costs by developing innovative products that combine GE Healthcare’s digital imaging and Veracyte’s genomic technology to ultimately deliver better, more affordable patient care.
GE Healthcare also established a strategic collaboration with diagnostic laboratory services company Clarient Diagnostic Services to develop a more accurate way to diagnose cancer. The American Medical Association reports a 10% error rate in cancer diagnoses. Clarient will use GE’s Omnyx software platform with its own molecular analysis technology to offer better digital solutions.
GE Appliances & Lighting Revenue Up 5% To $1.94 billion With LED Revenues Up 76%
GE Appliances & Lighting, most known for major appliances, launched a pilot program in San Diego, California and Jacksonville, Florida, to use city light posts to identify potholes and reduce traffic congestion through video analytics. The software-enabled lighting solutions will connect, collect and analyze data to optimize city operations. GE will use light posts that contain LEDs, sensors, controls, wireless transmitters and microprocessors to improve roads infrastructure as part of GE’s Intelligent Cities platform. Management also announced new projects with Wal-Mart Stores (WMT), Amazon Inc (AMZN) and Under Armour Inc (UA).
GE Oil & Gas Fourth-Best Performing Unit Despite 8% Revenue Drop On Lower Crude Prices
GE Oil & Gas provides to end-to-end solutions for companies in the oil and gas industry. With a near 50% drop in crude oil prices over the past year, GE Oil & Gas plans to cut 149 jobs at its Foundry Facility in Lufkin, Texas, and an additional 575 jobs at the Buck Creek Facility.
Despite cutbacks in demand, GE has a stellar reputation and continues to see reasonably robust demand for its products and services. For example, the company recently received an $850 million equipment order from Italian oil and gas company Eni (E) as part of the Offshore Cape Three Point project to provide increased gas to Ghana for its thermal plants.
General Electric and National Geographic Launch New Science & Technology Television Show
GE and National Geographic, a cable channel dedicated to geography and cartography, plan to launch a new show, titled BREAKTHROUGH, that showcases scientific research and innovation that improves people’s lives. The episodes will air to 440 million homes in 171 countries on the National Geographic cable channel. The show will be jointly produced by television production companies Imagine Entertainment and Asylum Entertainment, and is part of GE’s widely respected community outreach and marketing efforts.
Leadership Focused On Industrial Growth, Shareholder Returns
Jeffrey Immelt, Chairman and Chief Executive Officer, joined the company in 1982 and served in roles of increasing responsibility over the years. He is focused on high-growth industrial opportunities, derisking the company’s balance sheet and delivering solid shareholder returns. He is also Chair of President Obama’s Council for Jobs and Competitiveness and has made Barron’s ‘World’s Best CEO’ three times.
Jeffrey Bornstein joined the company in 1989 and now serves as Senior VP and Chief Financial Officer. Mr. Bornstein previously served as CFO of GE Capital after holding various senior financial positions within the company including GE Corporate Audit Staff, GE Power Systems, GE Capital and GE Aircraft Engine Services.
Keith Sherin serves as Chairman and CEO of GE Capital and Vice Chairman of General Electric. Mr. Sherin joined the company in 1981, rapidly moving up to VP – Finance and Financial Services Operations by 1995. He oversaw the successful spinoff of Synchrony Financial from GE Capital last year.
Solid Q1 2015 Performance Despite Weak Global Economy
For the three months ended March 31, 2014, General Electric had total revenues (including GE Capital) of $29.36 billion (down 12%), loss from continuing operations of $11.41 billion and a net loss of $13.57 billion (down 353%), or $(1.35) per share, down from a profit of $3 billion in Q1 2014. Losses were primarily related to the disposition of assets related to GE Capital.
Industrial segment revenues were down 1% to $24.36 billion while GE Capital revenues were down 39% to $5.98 billion from $9.89 billion in the year-ago quarter.
Industrial segment profit was up 9% with five of seven units reporting a growth in earnings. Industrial segment gross margins were up 90 basis points to 26.2% and operating profit margins were up 120 basis points to 14.6%. Industrial revenues were up on strength in China, India, Africa, the Middle East and Latin America.
As of March 31, 2014, General Electric had $129 billion in cash and marketable securities, $351.4 billion in borrowings and bank deposits, and $108.6 billion in total shareowners’ equity.
GE management has made a bold decision to exit the volatile financial services business to focus on strengthening its global dominance in industrials, where earnings per share were up 14% in Q1 2015. The disposition of GE Capital will strengthen and de-risk GE’s balance sheet and provide a stable platform for continued shareholder dividend growth and buybacks, with cheaper capital available for capital investments in industrial growth. GE will emerge significantly stronger without the burden of GE Capital and shareholders can expect strong future dividend growth.