I will admit that I have been too hesitant with regards to General Electric (GE). This is mostly due to its ownership of GE Capital and the outsized risk I believe that segment entails. However, during 2013, GE has proven that its industrial segments can indeed provide the revenue growth needed to fuel future earnings. GE currently offers a $0.19 per share quarterly dividend and yields just under 3.00%.
Q3 2013: Industrial volumes lead the way
Overall, GE had a strong quarter. Reported EPS growth was flat, due mostly to higher taxes. However, the company did see improved industrial sales and increases in its order backlog.
By far, GE's best performing division was Aviation, which saw 12% revenue growth to $5.4B and 18% profit growth to $1.1B. This growth was fueled by strong demand for jet engines. Orders were up an impressive 51% from last year, with equipment sales up 92%. The order backlog for this segment now stands at around $114B, which provides a key tailwind for future quarters.
Another segment posting solid results was GE's Oil & Gas division. For the quarter, this segment saw revenues grow 18% to $4.3B and profits increase 11% to $519M. Do note that this segment's results were boosted by the closing of the Lufkin acquisition. GE is benefiting from the North American shale boom, which has seen demand for oil equipment increase. Orders for the segment were $4.4B, up 4% from last year. One area of strength was turbomachinery, which increased 17%. However, Subsea equipment orders were down 41%.
GE's Power & Water segment continues to see weaker demand. Revenues fell 10% to $6.5B, however, profits actually increased to $1.3B. Of note is that orders did pick up this quarter, increasing 19% to $5.9B. Europe in particular is seeing a turnaround, with orders up 9%. During the conference call, GE noted that it expects this segment to outperform in 2014, mostly due to demand for Wind Turbines and renewable energy services.
GE's Healthcare segment posted inline (read flat) revenue growth, with moderate profit growth. The healthcare segment has seen revenue growth in East Asia, offset by weakness in Japan and Europe. Margins have increased, thanks largely to cost cuts and productivity gains. Orders were weak, with 2% growth, with most coming from equipment sales, offset by a 4% decline in services.
GE continued to gobble up stock in the quarter, buying around $2B worth of stock and paying dividends of $1.9B. For the quarter, the company returned nearly $4B to shareholders via stock buybacks and dividend payments. YTD, this figure stands at $13.9B.
GE Capital pays $2B in dividends for the quarter
GE Capital benefited from improvements in delinquency rates along with an overall stabilization in its portfolio. Revenues were down 5% due to a smaller asset base. However, net income was actually up 13%, thanks to lower losses and tax benefits. GE is slowly reducing the size of GE Capital, with the current asset size of $385B, down $39B from last year and $7B from last quarter.
For GE, "Simplification" likely means a restructuring is in the works
A cursory glance at GE's Q3 2013 conference call will reveal much of GE's 2014 plans. "Simplification" and similar phrases were mentioned nearly 20 times by the company. This points toward possible future cost cuts and downsizing. As I noted in a previous article, GE is likely to engage in a large corporate restructuring in the short to medium term.
This restructuring will likely be coupled with the previously announced plans to downsize GE capital. The company noted that it plans to provide a strategic update for GE in December along with its 2014 outlook.
Overall, GE did what it needed to do in Q3 2013. Industrial profits were up, even in the face of macro issues in the US and Europe. The Aviation and Oil & Gas segments posted very strong results, which will likely continue through Q4 2013.
Critics (read bears) will likely point toward weak EPS numbers and the impact of the downsizing of GE Capital. These are fair points, which need addressing. However, I suspect that GE will silence many in the next few weeks. If the company follows its recent tradition, a dividend increase may be announced this quarter. Given that GE is flush with cash from its asset sales, I think a fairly large dividend boost is on the slate, likely coupled with more share buybacks.