The U.S. conglomerate, General Electric (GE, Financial), has been expressing its desire to become a completely industrial sector focused company from being a hybrid of banking and manufacturing which it has been through the past years. In fact, after the financial crisis that created havoc in the U.S. in 2007-2008, the finance unit of GE has turned into its underperforming asset and the conglomerate has expressed several times in the past that it would like to sell it off to ascertain a better future ahead for the company. Recently, the company made some important announcements that sounded like music to the ears of its investors Let’s dig in deeper to get to the facts shared by GE and how they could impact its shareholders in the long run.
The announcement goes this way
On April 10, GE outlined a restructuring plan-of-action as per which it would buy back up to $50 billion of its shares, sell off around $30 billion in real estate assets over the coming two years and divest its finance operations further. Soon as the announcement was out from the company headquarters, GE’s stock jumped about 8.5%.
The stock repurchase program would be the second biggest repurchase in history after Apple’s $90 billion plan. As on January 31 of the year, GE’s outstanding shares in the stock market stood at 10.06 billion, and presently the company expects to reduce the shares outstanding count by as much as 20% to around 8-8.5 billion within the upcoming three years.
The divestiture campaign of GE Capital has been code named Hubble and this will erase one of the main legacies of the conglomerate in the next two years. This marks the recognition of the transformational push for being converted into a core manufacturing company, with no finance arm or such operations existing further in the financial reports going forward. GE has decided to sell most of the real estate assets of GE Capital Real Estate to funds managed by Blackstone (BX, Financial) and Wells Fargo (WFC, Financial).
Such downsizing of the GE Capital unit is necessary as the unit struggles to borrow since it got hit during the financial crisis. Since then, the conglomerate has been selling off pieces of its financial operations. One of the notable moves in the past was the spin-off of its private-label credit card arm- now referred to as Synchrony Financial, in a $2.9 billion initial public offering last year.
In fact, this divestiture marks a tough road ahead for GE as it will have to take an after-tax $16 billion charge in the first quarter of 2015 in connection to its plans to sell off GE Capital. In fact, $12 billion of such a charge which includes paying taxes on repatriated earnings would be on non-cash basis.
GE’s CEO, Jeff Immelt, commented in an interview with CNBC – “You really have a perfect market to be selling financial service assets, so you've got slow growth, low interest rates, lots of liquidity, people searching for yield… We think it's good for the regulatory world, it's good for investors. And that's been more or less recent. Now's the time to do it.”
Adding to investors’ kitty
Immelt has been quoted saying – “I think this is a great stock to invest in right now… You've got a tremendous industrial company and a chance to re-rate the whole company as a premier industrial company. You've got a fantastic set of cash flow options for investors coming at you, between buyback and dividend. And I think we've got wind at our back in terms of selling these financial assets. That's an extremely good one, two, three punch for investors.”
GE expects to return more than $90 billion back to its investors through 2018. While this would be done partially through the dividend policy and the selling of the remaining 85% stake in Synchrony Financial, the bulk would come from the $50 billion share repurchase program that would possibly shrink its share count by 2018.
Final word
The restructuring plan of GE would aid to generate more than 90% of its earnings from the industrial business by 2018, up from 58% in 2014. It marks a major transformation of a company which relied heavily on its financial arm, in the pre-financial crisis period to fuel its growth. Through this venture, GE intends to create a “simpler, more valuable company” that could provide maximum return to the shareholders in the coming years. Let’s stay tuned and keep watching!
