Seeking Alpha
Value, gold, closed-end funds, banks
Profile| Send Message|
( followers)

Summary

  • General Electric has a market cap of $266 billion and is responsible for $59 billion in pension assets (at FYE 12/31/13).
  • General Electric faces an issue many older companies do: providing benefits to workers who are not currently productive.
  • When competing for customers and employees, General Electric may be at a competitive disadvantage.
  • Newer companies can be more nimble and focused without having to concern themselves with discount rates, investment returns, and portfolio asset allocation.

General Electric (NYSE:GE) has a huge employee base. In fact, that employee base is so large it is measured to the nearest 1,000. Below is a chart of the employees (former and current) who have pensions at the company.

12/31/13

Total employees

Active employees

128,000

Vested former employees

229,000

Retirees and beneficiaries

263,000

Total

620,0000

This article continues my theme of analyzing large multinational firms with major pension obligations. See this recent article on Disney (NYSE:DIS) for a look at another major employer.

Union Discussion

At year-end 2013, General Electric and consolidated affiliates employed approximately 307,000 persons, of whom approximately 135,000 were employed in the United States. Approximately 16,900 GE manufacturing and service employees in the United States are represented by unions. The majority of such employees are represented by union locals that are affiliated with the IUE-CWA, The Industrial Division of the Communication Workers of America, and the AFL-CIO.

During 2011, GE negotiated four-year agreements with most of the U.S. unions. These agreements modestly increase ongoing costs over the term of the contracts on an aggregate basis. However, the agreements also implement new features that focus on cost containment for health and pension plans. Effective January 1, 2012, all production employees participate in a new consumer-directed health plan. In addition, production employees who commence service after that date will not be eligible to participate in the GE Pension Plan, but will participate in a defined contribution retirement program (think 401k).

Pension Update at 12/31/13

At the end of 2013, the GE Pension Plan was underfunded, on a U.S. GAAP basis, by $4.7 billion, and the GE Supplementary Pension Plan, an unfunded plan, had a projected benefit obligation of $5.2 billion.

Just like Disney changed the discount rate at year end 2013, so did GE. The underfunding at year-end 2013 was significantly reduced as compared to 2012, as the effects of higher discount rates and higher investment returns (14.6% return in 2013) more than offset liability growth.

GE's principal pension plans discount rate increased from 3.96% at December 31, 2012 to 4.85% at December 31, 2013, which decreased the pension benefit obligation at year-end 2013 by approximately $6.8 billion. The GE Pension Plan assets increased from $44.7 billion at the end of 2012 to $48.3 billion at December 31, 2013, primarily driven by higher investment returns. Assets of the GE Pension Plan are held in a trust, solely for the benefit of Plan participants, and are not available for general company operations.

The Low Interest Rate Environment Hurts GE!

Failure to achieve the expected 7.5% return on plan assets is driven by various factors, which could include a continued environment of low interest rates. The underperformance could also result in an increase to the amount of cash GE is required to contribute to pension plans. Additionally, upward pressure on the cost of providing healthcare benefits to current employees and retirees may increase future funding obligations.

Cost of Pension Plans

This includes the service cost for benefits earned, the expected return on plan assets, the interest cost on the benefit obligation, and the net actuarial loss amortization:

2013

2012

2011

Pension plans cost

$5.1 billion

$4.4 billion

$2.8 billion

The fair value of the Plan Assets was as follows:

Principal pension plans

Other pension plans

12/31/13

$48 billion

$11 billion

12/31/12

$45 billion

$10 billion

How are the Assets Invested?

12/31/13

Principal pension

plans

Other pension

plans

Equity securities

45%

55%

Debt securities

(including cash)

31

34

Private equities

13

1

Real estate

7

5

Other

4

5

Assets in GE's principal pension plans earned 14.6% in 2013, and had average annual returns of 6.5%, 5.9% and 8.9% per year in the 10-, 15- and 25-year periods ended December 31, 2013, respectively.

These average historical returns were significantly affected by investment losses in 2008. GE has assumed a 7.5% long-term expected return on those assets for cost recognition in 2014. This is a reduction from the 8.0% assumed in 2013, 2012 and 2011.

Equities:Dollars in millions
US equities$12,635
Non US equities9,124
Fixed income
Fixed income and cash2,078
US Corporate bonds4,555
Residential MBS1,093
US government bonds5,253
Other debt securities2,317
Private equity6,269
Real estate3,354
Other1,791
Total48,297

Conclusion

I conclude that GE is at a disadvantage given that management must focus their time on pension acrobatics. If GE were to trade in line with the S&P 500 index, its current P/E could fall from roughly 22x to about 18x. Also, note that GE has an above market dividend yield of 3.3% compared to an S&P 500 dividend yield of 1.7%.

This article does not describe the current drivers of the GE business, which are critical to valuing the stock. These issues include the demand for financial services, demand for locomotives and also the strength of the aerospace and energy industries. Lastly, I am a Financial Analyst, and not an actuary. The above article is an opinion, and not investment counsel.

Disclosure: I am long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: General Electric: The Pension Albatross And The Employee Base