- He is tending to GE's $250 billion industrial backlog by gradually allowing GE Industrial to account for 70% of profits.
- He is putting General Electric back on the path to 8-12% annual dividend growth.
- He is engaging in "selling high" by patiently waiting to initiate the Synchrony IPO at a time of high profits and high valuations in the stock market.
It would be hard to pick a current CEO of a mega-cap American company that generates as many mixed emotions from investors as General Electric's (NYSE:GE) Jeffrey Immelt. Some of the criticism of Immelt is patently unfair; people who criticize GE's stock performance since Immelt took over for Jack Welch tend to ignore the fact GE was trading at 34x earnings the day Immelt took over as CEO. Considering that General Electric typically trades at 17-19x earnings during times of normal pricing in the stock market, he inherited a situation in which the stock was trading at almost twice the valuation of its normal range. It would take almost 100% profit growth just to tread water when the stock returned to fair valuation.
The other reason why some investors view Immelt's actions with a jaundiced eye is because General Electric had a reputation for dividend safety, but as the country entered the financial crisis, he promised the public that the dividend would not be cut, and then shortly thereafter, the troubles at GE Capital grew so bad that Immelt had to announce a dividend cut. I don't really blame Immelt for having to cut the dividend out of financial necessity, and I can't really find fault with people who hold this fact against Immelt, either.
But what I find most interesting is what Immelt has been up to since the dividend cut in terms of creating value for shareholders:
1. He has secured General Electric's role as an industrial powerhouse. The backlog is now approaching $250 billion. With the exception of a few defense contractors, it's impossible to find any other company in the world with as much pre-ordered work as GE. In 2007, the operations between GE Capital and GE industrial were roughly split 50/50. Now, GE's $1.65 in profits per share consist largely of $1.10 or so coming from industrial operations with the other $0.55 in profits coming from financial operations. Directionally, GE is moving towards a 70/30 split, and given that GE has seen power, water, and aviation demand increase 8% in the past four months, it looks like the demand for industrial growth is growing even stronger. It's becoming increasingly clear that the old General Electric is back, and you might as well get in at $25, because waiting for crystal clarity also means you'll probably be looking at a much higher stock price when that time comes.
2. By getting the pain of the dividend cut over with in one motion, Immelt has been able to get GE back on track to its typical dividend growth. Having to cut a dividend is an art as much as a science. If you don't admit the mistake and cut it enough, then you enter one of those situations where you don't have enough retained profits to fund growth or you could be facing a second cut for shareholders.
By getting the pain over all at once, Immelt freed up the capital to immediately grow profits again. GE made $1.03 in 2009. By temporarily lowering GE's dividend commitment to $0.40, he was able to get GE back on the path to rapid profit growth. The numbers speak for themselves: GE grew profits to $1.15 in 2010, $1.31 in 2011, $1.52 in 2012, and $1.65 in 2013. Meanwhile, the dividend has grown from $0.10 to $0.22 and should be back to pre-crisis levels in the next three years.
On a forward-looking basis, GE's dividend potential is great. It is only paying out half its profits to shareholders in the form of dividends, the financial operations have been greatly reduced (with the risky real estate loan portfolios eliminated entirely), and the $250 billion backlog has the company positioned for 8-12% growth over the next five to seven years. GE's going to be positioned to grow its dividend 8-11% for years to come, and a lot of that has to do with the intelligent strategy of getting the pain over all at once and rebuilding, rather than letting it linger if the cut had been more modest and GE didn't have the free hand of retained earnings to start tackling its backlog.
3. When everyone was calling for management to shrink GE Capital immediately, Immelt waited to get a good value with the Synchrony IPO. Synchrony, which is responsible for about 9% or so of GE's profits, will have its IPO sometime in the next year. If Immelt got rid of this division in 2010, it would have only been about two-thirds as profitable, and he wouldn't have been able to maximize value for shareholders. By waiting for the economy to improve before ditching the company's private label credit card division, Immelt is maximizing the value that he's able to get for the operations so that he can raise the capital to retire 500 million GE shares from the market. It was a mature decision to wait for the economy to improve and ignore the calls for GE Capital to start divesting immediately; it is a sign of wise management to start the divestment process when market valuations are much higher.
If you analyze Immelt's moves with the company since the dividend cut, they seem quite intelligent. He's been using retained profit to address GE's huge backlog, and that has helped profits increase from $1.03 during the financial crisis to $1.65 now. He has also been gradually returning GE to its industrial roots, ignoring the temptation to do it all at once. If Immelt had General Electric shed its capital divisions immediately so that the company could have a 70/30 split, he would have not received nearly as much money in 2010 as now. Not only were the profits 33% lower then, but the market multiple would have been much lower. And lastly, by getting the dividend cut all at once, he has been able to return GE to its historical tradition of high dividend growth. The company doesn't have high-risk financial assets on its balance sheet anymore, and the payout ratio is still only 50-55% while industrial side is growing at 8-9%, and this has put the company in great position for dividend growth going forward. A fair analysis of Immelt's move since the dividend cut seems to be a story of value creation for shareholders.