GE: Too Tired For Growth, But Yield's Attractive

The New York Times “G.E.’s Appliance Deal Gets New Spin” and the press release “GE Announces Its Intent To Explore Strategic Options For Consumer & Industrial With A Focus On Spin-Off” imply that General Electric (GE) is struggling to be considered a growth company. I always thought GE was valued for steady earnings and a reasonable (currently $1.24) 4.5% dividend.

All this portfolio of businesses talk makes me think of a bad mutual fund. I don’t like hearing about changing the mix of businesses just for the sake of improving the overall portfolio’s growth rate. Revenue and earnings growth are more cosmetic than cash flow generation. I would like to see GE run for only one purpose – fat dividends for shareholders. In the current business climate, no financial alchemy will generate growth. Selling slower growing businesses to buy faster growing businesses is foolhardy. Unfortunately, this process is accelerating with CEO Jeffery Immelt.

While I don’t want to see GE selling buggy whips and the move to wind energy is smart, but spinning off Consumer & Industrial makes little sense. GE’s value adding as a conglomerate is in talent development and management science – systems and procedure. How will shareholders be better off with a separate Consumer & Industrial company outside of the discipline of GE?

Certainly the big move into healthcare is hitting the wall of public spending constraints and GE apparently found no appetite for its appliance business in a down housing market. Did selling Plastics increase growth? GE is facing the same reality that Greenspan faced – you can’t continuously maestro yourself into perfection. GE simply has to ride out the business cycle.

45% of GE’s profits are derived from Commercial Finance and Money (consumer finance). The only remix that I can see is splitting GE between finance and all else. Whatever synergies exist between the two distorts the true profitability of the finance operation.

Given no changes in philosophy, I think GE is a reasonable buy at $20 with a 6.2% yield. Forget about growth.

No Disclosures.

Comments

[margin321:]

<<Did selling Plastics increase growth? >>

You have got to be kidding to second guess Immelt for selling Plastics when nat gas was at $4 and oil was at $30. That was a stole of genius with respect to timing. What do you think plastic is made from? That unit would be losing big money today and not worth much to sell.

While we are at it, what about the swap of re-insurance for water infrastructure. What he shed (Re-INS) is losing money and worth less than half of what he got. What he bought (water infrastructure) has seen revenues grow from a few hundred million to a few billion.

2008 Jul 11 07:27 AM

[vaporman:]

when will GE write down it's commercial real estate losses? it will look expensive at $20 then.

2008 Jul 11 10:41 AM

[johnthebear:]

Vaporman, please tell me more about commercial real estate loans held by GE and what relative size is it to the total assets of the company.

I agree that commercial real estate loans will take a big hit, none of which has been reflected by the banking system...yet... but it will be bad when it happens and will affect large regional banks.

Thanks. (I invest in SRS)

2008 Jul 11 11:32 AM

[Chris Marshall:]

GE has about $57 Billion of its own real estate assets, but the 2nd Qtr press release lacked details to see what write downs had taken place, along with the lack of clarity on default rates in the finance divisions.

I do think that talk of $20 is a bit on the low side, my fair value is around $24- $26, but in an poor market, it may overshoot to the downside slightly.

Regarding the spin off of the appliance/consumer lighting division, why make the shareholders suffer when you can't sell it a reasonable price?

1) The new entity will almost certainly lose the AAA rating that GE has.

2) There will probably be a lot of covenants attached regarding the use of the GE brand, as Philips or Haier may buy it in the future, and extend the brand to cover some of their other product ranges.

3) Points 1 and 2 will cause the value of the new entity to drop significantly.

Regarding the approximately $ 200 Billion of securities maturing in 2008, the debt will probably be rolled over, but at what price?
This must affect the bottom line as credit rates are tight and will certainly be above the price that the new loans are replacing.

GE certainly has problems to face in the 2nd half, but large write downs were always unlikely this Quarter, or the CEO would have become the ex- CEO, it only just made the estimate without them. The full year estimate is still extremely optimistic.

2008 Jul 11 04:41 PM

[vaduz:]

20 would be certainly a good buy for the next 24 months or so

2008 Jul 11 04:55 PM

[Ames Tiedeman:]

You want a dividend? Buy and oil trust, not this GE.

2008 Jul 11 09:47 PM

[truthinvesting:]

Altria is amuch better source of dividend than GE and at least the business is EASY to undersatnd.GE does business with Iran and if you have ever watched msnbc you would think morons have invaded the earth. The stock is priced firly but Altria is clearly superior for growth and dividend and at least you UNDERSTAND their financials

2008 Jul 12 10:06 AM

[Football Geek:]

The auther has it all wrong, GE will grow as emerging markets
continue to grow. The financial side of the business is down
at the moment, but will rebound. Green energy, especially
wind power is here to stay, and will grow.
The dividend is safe and growing, because earnings will
grow.
Good thing the rating question has been removed from
the articles. The quality of some of these stories is
poor.

2008 Jul 16 09:55 PM