By Mark Bern, CPA CFA
I can’t answer that question definitively, but I suspect that some long-time shareholders would like management to bring more focus to the non-financial segments of the business. I don’t own General Electric (NYSE:GE) stock primarily because of the simple fact that the company, as it is now structured, is too dependent upon the financial unit for its earnings. If I want to own a financial company I’ll do my research of financial institutions and won’t consider a conglomerate to fill that need.
Okay, so if GE did spin off GE Capital what would happen? I can’t help but think that the board and senior management would get more serious about the industrial segments’ performance. Is Six Sigma just a motto or is the company going to apply the true principals again? GE has some great assets and some great potential but the company has not executed. Back in the days of Jack Welch the lack of execution that has plagued GE would not have been tolerated. I believe that the company needs to spin off GE Capital and remove management’s crutch. After all, since the unit provides more earnings than any other unit by far, senior management is more than likely spending far more time supporting and nurturing the one unit to the detriment of the rest of the company. The company without GE Capital would probably command a better credit rating because of the lower risk and the high quality assets it could use as collateral. That could reduce the cost of capital for the company providing greater management with greater financial flexibility to acquire growth or develop it through a greater emphasis on R&D. With greater focus I would expect results to improve at several of the stepchildren units that form the core of company that most investors envision when we think of GE.
GE Capital, on its own, has excellent earnings power. The unit is as capable as most large financial institutions to drive growth and earnings without being part of another company. I think that the value that investors would place on the unit would be greater as a stand-alone company. I also think that management, with greater focus on the remaining units, could enhance shareholder value through organic growth, divestitures and strategic acquisitions to the company that once held either the number one or two positions in every industry in which it competed. That was true dominance. I long for that GE of the past.
And one last factor that I should point out that might interest shareholders. I would expect the combined dividend of the two separate companies to increase much faster than under the current configuration. Think about it. Two companies, each run more efficiently, would create more profits, more free cash flow and have more cash available to give back to shareholders. The dividend history is better than average, but the future could be much better.
Until a spinoff happens I think I'll stick with United Technologies (NYSE:UTX) for more stable growth and dependable dividend increases.
To read earlier articles I have written on GE or UTX please see my author page.
Disclosure: I am long UTX.