General Electric: Focus On Financial Engineering
Banks, Long-Term Horizon
Seeking Alpha Analyst Since 2008
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.
Summary
- Larry Culp, GE CEO has been doing some talking around the recent deal in which GE will dispose of its aircraft leasing business, and a lot of debt.
- It appears as if the ultimate focus of Mr. Culp, in turning around the GE conglomerate, has been the reduction of debt and getting the GE stock price to arise.
- This last goal will be accomplished by a 1-dor-8 reverse stock split that will raise GE's stock price from around $13 per share to around $112 for share.
- All financial engineering.
General Electric Co. (NYSE: GE) stock was selling modestly over $14.00 per share in the afternoon of March 9, 2021.
By noon on March 10, the stock was selling at less than $13.00 per share.
At 2:30, the stock was up to around $13.25 per share.
What caused all this movement? Well it was the news that General Electric was near a deal to sell off its aircraft leasing business to AerCap, and Irish firm, for around $30 billion.
General Electric stock had been rising in recent months, its recent trough was around $6.20 last September, and had seemed to be gaining investor interest.
Now, the market dropped by a little over 9.0 percent once the news seemed to spread.
The investor response did not seem to be too positive.
Larry Culp, GE CEO, has not been a real investor favorite since taking over the helm of the company in the middle of October 2018. The stock price when Mr. Culp took over was around $11.85 per share. The trajectory, until this past six months or so, has been downward.
One reason for this, a reason I have emphasized in my articles about Mr. Culp and General Electric is that no vision about the future was given as Mr. Culp started to dismantle the company.
The latest transaction doesn’t seem to give us much of a vision about the future of GE either, but maybe it does clarify where Mr. Culp has been coming from.
Just A Financial Approach To The Firm
According to Thomas Gryta in the Wall Street Journal,
Mr. Culp said the AerCap deal brings GE closer to being a well capitalized company after being ‘almost wholly focused on deleveraging and strengthening our operations.’”
It seems that the one, major focus Mr. Culp has had General Electric moving forward is how much in debt it had been.
General Electric ended 2020 with about $75 billion in debt. More than $50 billion of that debt was related to the activity of GE Capital.
GE Capital has always carried a lot of debt. It was a financial institution and it was large enough that, at one time, it brought in more than 50 percent of GE’s earnings. Not bad for an industrial firm.
But, GE Capital developed problems during the Great Recession and has had problems finding a place in the overall company ever since. But, it was a financial company and, as a consequence, it carried a lot of debt. Because of this…so did the whole company.
Mr. Culp has stated that GE would pay off $30 billion more in debt following the AerCap transaction.
But, also, under an agreement in the deal, GE, which will still retain a 46 percent ownership in the company, can sell a portion of its stake after nine months, and the entire holding after 15 months.
That is, GE has the option to completely dismiss the aircraft leasing business within a relatively short time. Hurrah, more debt can be paid down.
GE is accomplishing its goal!
However, S&P indicated that after the sale of the aircraft leasing, “ debt leverage will be higher than previously expected due to the consolidation of GE Capital financials. “
And S&P will lower its credit rating on GE to triple-B, two notches above junk status.
The Future
GE management quickly switched the focus. According to Mr. Gryta writes that in an investor meeting held Wednesday, “GE executives maintained their financial targets for 2021, concluding a goal of generating between $2.5 billion and $4.5 billion in free cash flow from industrial operations.”
“This really does mark the transformation of GE into a more focused, simpler, stronger company,” Mr. Culp said in an interview. GE will essentially return to being a manufacturer of power turbines, jet engines, wind turbines and hospital equipment.
Concern Over The Dividend Payment
Another major issue that keeps coming up for Mr. Culp is the GE dividend that has been cut to $0.01 per share. Mr. Culp has not opened up the topic of a dividend raise with the comment that as the current deal happens, paying a higher dividend becomes an option.
But, to also make things look better, Mr. Culp has proposed that GE enter into a reverse 1-for-8 stock split. The reason, according to Mr. Culp,
If you look at our share count, it is way out of whack with any conceivable peer.”
See, its all about finance, but this is something that “healthy,” blue-chip companies do.
The move will take GE's share price to around $112 per share.
Practically speaking, investors often seem to see higher-priced shares as more attractive—and companies with prices below certain thresholds, like $10 or $1, as shakier. but, a reverse split can suggest that management and the board see little prospect for a significant recovery in financial results or the share price, absent the maneuver.
And, the dividend yield, will go up to about $0.08 per share, as least until Mr. Culp adds some more to it. But, this will do nothing to address all the underlying problems that GE faces.
Takeaway From This Analysis
What I get from all this information coming from Mr. Culp and General Electric is that I have been wrong about assuming that there was no vision attached to what was being done with the company.
It seems as if there was little overall picture of what the company would look like in the future except that it would become a lot less leveraged and it would maneuver its earnings and dividends to create investor interest in the company.
This appears to be nothing more than financial engineering in an attempt to achieve a higher stock price. So far it hasn’t seemed to work.
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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.
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