General Electric's (GE, Financial) share prices are seeing significant gains today after the company announced its massive restructuring plan. GE intends to create a simpler, more valuable company through this plan. Here are the major highlights:
- GE will sell the bulk of the its real estate assets held in GE Capital Real Estate to funds managed by Blackstone. Wells Fargo will acquire a portion of the performing loans at closing. The Company also has letters of intent with other buyers for an additional $4 billion of commercial real estate assets. In total, these transactions are valued at approximately $26.5 billion.
- GE will dispose most of GE Capital assets over the next 24 months except the financing “verticals” that relate to GE’s industrial businesses. Under the plan, the GE Capital businesses that will remain with GE will account for about $90 billion in ending net investments (ENI) excluding liquidity – about $40 billion in the U.S. – with expected returns in excess of their cost of capital.
- GE intends to return more than $90 billion to investors in dividends, buyback and the Synchrony exchange through 2018. The exits of the targeted GE Capital businesses should release approximately $35 billion in dividends to GE (subject to regulatory approval), which, under GE’s base plan, are expected to be allocated to buyback; this is in addition to the impact of the Synchrony exchange and ongoing dividends. The GE Board has authorized a new repurchase program of up to $50 billion in common stock, excluding the Synchrony exchange. GE expects to reduce its share count to 8-8.5 billion by 2018. These actions would still allow room for opportunistic “bolt on” acquisitions in GE’s core markets. GE also said it plans to maintain its dividend at the current level in 2016 and grow it thereafter.
- Under the plan, GE expects that by 2018 more than 90 percent of its earnings will be generated by its high-return industrial businesses, up from 58% in 2014
Analyst commentary on this mega restructuring has been positive. In their research note released today, Barclay's analysts commented:
"After several years of begging GE to take notice of the new secular realities in the banking business — GE has listened. GE Capital, good riddance. It’s been north of 10 years of headaches — time for you to go. And going it is. The mechanics will take a bit of time and may be complex but it doesn’t matter. If you buy a share of GE stock today you know what you are getting. A world-class aircraft engine business, share gaining powergen business, share gaining locomotive business, low risk and cash generating medical business, a few misc other industrial assets that in total are just ok, and for bears — an oil/gas business that we will have to contend with. Overall, versus other industrial peers, I’ll take this business mix all day long."
GE is currently trading at a forward PE of 15x and has a dividend yield of 3.70%. After the spin-off, GE's remaining business should get a higher PE multiple since most of it will comprise of GE's high return industrial business. The company has seen a good growth in EPS over the last couple of years and the proposed share buy back will further accelerate this growth.
The company is also seeing insider buying and its director William G Beattie has purchased 800,000 shares of the company in February this year. Sell side analyst are very positive on the company's prospects with 11 out of 18 analysts covering the stock rating it as buy or strong buy. Remaining seven analysts have hold ratings on the stock. I see a good likelihood of more upgrades post today's announcements. GE is attractively valued even after today's run up. Its EPS growth and dividend are likely to increase further going forward. I recommend buying the company.
You can find the company's complete presentation on this mega restructuring here.
