- GE stock has performed well in 2015 due to the company's success in its restructuring efforts.
- General Electric still has way to go in 2016 with its restructuring efforts.
- Will 2016 be another good year for GE stock?
Shares of General Electric (NYSE:GE) have generally underperformed the Dow Jones over the last five years. In 2015, however, the tables have turned with GE stock greatly outperforming the Dow Jones Industrial Average (INDEX:INDU), with gains of 20.2% vs. -1.2% for the Dow Jones. That’s a remarkable performance by GE stock when you consider that no other conglomerate stock has managed to even break even YTD.
GE Stock vs. Dow Jones Returns YTD
A lot of the strong performance can be pinned on the company’s continuing success at its restructuring efforts. GE has over the years evolved from an industrial manufacturing giant that manufactured things like light bulbs, home appliances and electric gear into an industrial conglomerate through dozens of acquisitions, innovations, and reorganizations. More importantly GE has over the years gained a huge exposure to the high-risk banking industry through its consumer finance arm, GE Capital.
GE Capital provides store credit cards for more than 55 million Americans, as well as large retailers such as The Gap and Wal-Mart. GE Capital helped finance GE customers by offering low-interest loans that banks could not match. The two companies shared a symbiotic relationship since General Electric helped GE Capital by furnishing it with a reliable stream of earnings and other tangible assets that helped the entire company maintain a triple-A credit rating. The stellar rating helped GE borrow funds from world markets at lower rates than what a large bank would typically manage, an advantage that GE Capital passed on to GE customers in the form of lower interests on their loans.
During its hey days, GE Capital accounted for about 50% of General Electric’s operating income. But the high-risk nature of the business became apparent during the capital markets disruption of 2008. GE Capital was unable to meet its obligations due to the financial crunch which burned a huge hole into General Electric’s profits.
It’s this risk that has made the market to assign a much lower valuation for GE stock compared to pure-play industrials. By offloading its finance business, GE will re-establish itself as a pure-play industrial players and in the process return to investors’ good books.
GE Capital is an enormous business--GE said that the business had $501 billion in total assets just before the restructuring started. General Electric’s plan is to gradually unload assets by the company, and has so far been able to achieve its targets. GE had a target to unload GE Capital assets worth $100 billion in 2015. GE has been gradually selling its GE Capital assets, and recently came close to hitting its 2015 target by selling its mortgage loan portfolio from its U.K. home lending business.
General Electric plans to complete sale of GE Capital assets in 2016, about one year earlier than its previous target of 2017.
Other than selling its finance arm, General Electric has been making strategic acquisitions and spinoffs to strengthen its core industrial goods business while getting rid of the consumer business overhang.
GE plans to acquire Alstom’s power business for $14 billion, which will become the company’s largest ever acquisition. The deal will combine the assets of the world’s two largest manufacturers of power plant hardware, which is crucial for GE’s strategic plan to grow its core industrial business. The acquisition will help GE expand its electric turbine business footprint. The combined businesses are expected to yield significant cost synergies, with cost savings of $3 billion over the next five years being in the ballpark. The cost savings will be incrementally accretive to GE’s earnings, with earnings in 2016 receiving a boost of $0.05-$0.08 from the deal.
Meanwhile General Electric is trying to sell its non-core consumer appliances business, the second largest in the country with 15% market share. GE has been trying to sell the business to Electrolux, the third-largest consumer appliances maker in the country with 10% market share, for $3.3 billion. But the deal has been met with resistance by the Justice Department which has been opposing the deal on antitrust grounds, although Whirlpool, the largest name in the space, owns a 31% market share.
The consumer appliances business is a small part of GE contributing less than 4% of revenue and profits. But the business is solidly profitable, and stands a good chance of finding another buyer. Some investors, however, feel that General Electric should simply keep the business due to its iconic nature.
By examining General Electric’s restructuring efforts, it’s perhaps fair to say that the company is almost halfway through. GE is on course to report its first full-year year of losses after more than 20 years--the company has lost $12.4 billion through the first three quarters of 2015, partly due to the cost of restructuring and partly due to divestiture of key businesses.
General Electric recently hiked its dividend by 4.5% and is a well-known dividend aristocrat, having grown dividends uninterrupted for half a century in the run up to the 2008 financial crisis. GE shares yield 3%. Although the lowered earnings mean that the payout ratio has jumped to 92% thus constraining chances of further dividend increases, the company has $136 billion in cash and short-term securities with which it can continue making strategic acquisitions. GE stock appears well-primed for further solid gains in 2016.