General Electric (NYSE:GE) is no stranger to issuing debt, often at advantageous coupon rates due to its size and strength. These issues, including preferred stock, are often sized for institutional investors only, leaving retail investors without a way to get exposed to GE's debt. However, earlier this year, GE issued $750 million of notes due 2053, paying 4.7% (GEK), offering investors a chance to buy GE debt and profit from GE's continued prosperity without the inherent market risk of common shares. In this article, we'll take a quick look at GEK and see if it may fit into your portfolio.
The GEK is a true debt issue. In other words, GE issued $750 million of notes that are due to mature in 2053, or 40 years from the issue date, but the notes are traded on an exchange like a stock or ETF. The notes pay quarterly interest payments of 29.375 cents for an annualized dividend of $1.175 per share. With the issue price and call price both at $25 per share, that works out to a coupon of 4.7%. However, the swings in the interest rate market this year following taper talk from the Fed have caused GEK and other interest bearing securities to largely fall in price. GEK was issued earlier this year at $25 but has quickly fallen to its current price of $19.48. This represents a massive 22% discount to the call price and I believe this is where the opportunity lies for retail investors with the GEK issue.
With such a huge discount to the issue price, two material benefits accrue to new buyers of GEK. First, you can now purchase more shares with the same investment dollars simply because they have fallen 22% since being issued. This means that you also receive more in dividends as the current yield is 130+ basis points higher than the coupon rate due to the lower price. At the current price of $19.48, new investors receive a 6%+ yield on their shares instead of 4.7%. This is a huge difference and it makes the GEK a much more attractive investment vehicle than at 4.7%.
Second, if you purchase shares for such a large discount, you are entitled to large capital gains should the issue be called at some point in the future. GEK cannot be called before May of 2018, five years from the issue date, but in the event that it is called, holders will receive the full $25 per share call preference. If you do the math that entitles holders to a 28% capital gain! Considering this is a debt issue, that is extraordinary to me. It is this combination of current yield and potential capital gains in addition to the issuer that is attractive to me when looking at the GEK.
Of course, there are some risks to owning GEK, as with any other security. First and foremost, interest rate risk prevails with GEK. Obviously, the selloff since the issue date has been due to interest rate predictions and fluctuations; GE isn't in any imminent danger of not being able to make interest payments. There will always be interest rate risk with GEK or any other debt security and it is just something you have to deal with if you want to invest in debt securities. If you are a long-term holder, you should see price volatility as an opportunity to get more shares at higher current yield but I understand that volatility can be hard to stomach. The point is, interest rate risk is the main risk with GEK and it is something debt investors must come to terms with.
The GEK offers investors a great way to get exposure to GE without having to purchase common stock. With GEK, investors get a very strong payer and a great current yield without having to sacrifice quality. GEK was rated AA+ by S&P upon issue so it is a very strong, investment grade debt issue which is rare among exchange traded debt securities, in my experience. I like GEK because of the combination of the strong payer, the robust current yield of more than 6%, the very high credit rating of the issue and finally, the possibility of large capital gains in the future. While I don't think GE will necessarily call this issue in 2018, it could certainly happen; we are a long way from 2018. And if it does, you'll not only receive a 6%+ yield for more than four years but also a huge capital gain in the process. Regardless, for long-term income investors, you could do much worse than GEK.