General Electric (GE) is an icon to most everyone. Consumers know the brand and products as a household name while investors know the returns and dividend the company provides to its shareholders. General Electric, a common stock that is held in most mutual funds. General Electric, the name whose earnings announcements were used as an indicator for future economic outlook. General Electric, the globally diversified industrialized and financial services company whose products range from aircraft engines, water processing, consumer financing to medical imaging equipment; a big difference from the formation of General Electric (GE).
So, how was General Electric formed? For this we have to go back to one of the most famous inventors of America, Thomas Edison, the inventor of the long-lasting practical electric light bulb. He was one of the first inventors to apply the principles of mass production. Thomas Edison’s career took off, and in 1892 a merger of Edison General Electric Company of Schenectady, New York and Thomson-Houston Electric Company of Lynn, Massachusetts formed General Electric. GE became one of the original 12 industrial companies listed on the Dow Jones Industrial Average (Dow) Index in 1896. Today, GE remains the only one of the original 12 still listed on the Dow Index.
In the 1930s the first garbage disposal hit the stores along with GE Consumer Finance division evolved to allow families to purchase General Electric appliances on credit.
This finance unit now known as GE Capital Corporation grew to become one of the highest revenue divisions for GE.
The 2008 financial crisis caused profits to slump at GE Capital and ultimately reduced the dividend GE was paying. GE Capital has a large portion in consumer business that consists mainly of credit card loans and residential mortgages. These loans were not leveraged enough like a bank, which needs to hold a certain amount of cash reserves, resulting in GE having an increase in loan losses and risk. Reducing the overall size of GE Capital by restructuring other divisions and acquiring non-financial companies has benefited the core businesses, setting the stage for continued growth. And currently, there are rumors indicating management is exploring the possibility of spinning off the consumer portion of GE Capital division.
Let me explain what a spinoff is. A parent company (General Electric is the parent company to GE Capital) owns several diversified businesses and wants to divest one of them to create its own independent company. The divested business is most likely the least profitable, and parent company feels the core business will be stronger without it.
The general rule for spun-off companies; they are worth more as independent firms and it usually is a Win-Win situation. This year alone, there have been several spun off companies, such as Phillips 66 from Conoco Phillips (energy company) and Abbvie Incorporated from Abbott Laboratories (healthcare company).
GE, once a $42.00 stock in 2003, now a $23.00 stock (June 2013), remains a diversified global industrial company with Energy Infrastructure as the leading revenue division. Other divisions are GE Capital (both commercial and consumer lending), Aviation, Healthcare and Home & Business Solutions.
As an investor, I want to know how a company has performed in the past but most importantly I want to know how the company is going to perform going forward. What are the expectations of a company to make them appealing to you as an investor? We like the new designs and style for the appliances we purchase, why not like the design of how a company is managed. So, GE Capital’s allocation of business is a concern to me but as I dive into the details, I learn this allocation is getting smaller and more solid. This should continue to be positive for GE. They have a large pipeline of acquisitions identifying the growth opportunities. Their global sales and services type of industrial model allows for a nice backlog of orders. The restructuring provides cost cutting and that is important to the bottom line earnings. And GE has increased their dividend by 21% during the last three years!
Part of the long-term growth plan includes management wanting to return $18 billion in cash to its shareholders and repurchase $10 billion in stock, all in 2013. You may wonder how repurchasing stock benefits the shareholders. Repurchasing stock reduces the number of shares outstanding, the supply, and increases the earnings per share, EPS. Management will buy back their own shares from the marketplace because they feel owning their own company is the best investment!
If the light goes on and you see a well-run company, why not participate in their growth. As always, know what you are investing in and good luck.
Karen Crump is Senior VP & Investment Officer at Charter Trust Company’s Concord office. She can be reached at 603-856-5236 or email Kcrump@chartertrust.com