- GE CEO Jeff Immelt now calls his firm a Digital Industrial company.
- The aim is to control markets by controlling data, then profit from controlling data flows.
- GE needs to improve its earnings to back the dividends.
After nearly 15 years transforming General Electric (NYSE:GE) from an entertainment-and-finance company into an industrial equipment firm, CEO Jeff Immelt’s latest letter to shareholders calls it a "digital industrial company."
What he means is that GE will control software and data flows created by the products it makes to control the next transformation of society -- what I have called the Internet of Systems.
A traffic light, for instance, is a thing. A region's traffic lights, turning on-and-off in response to traffic as mediated by software is a transportation system. A CT scanner is a Thing, but when connected by software to an entire hospital’s scheduling and patient medical records it becomes part of a healthcare delivery system.
GE's leadership in key components -- jet engines, CT scanners, industrial turbines -- gives it a chance to define these system-level standards and create value from them. That's why GE has launched its own cloud, called Predix.
Predix is the fulcrum for GE’s efforts to build alliances around its software. Phone networks like AT&T (NYSE:T) see Predix as a way to lock in corporate business. Chip makers like Intel (NASDAQ:INTC) see it as a way to quickly build dominant positions in chip-based systems. Consultants like Cap Gemini see it as a way to build their outsourcing businesses.
That's why GE’s new ads are built around a strange young programmer, Owen, whose friends and family don't understand what he does.
It’s as much a recruitment gimmick as anything – it doesn’t sell much beyond the image. (Owen Young was a legendary GE chair who also founded RCA.)
But Immelt does claim to know what’s happening. He has launched a blog with contributors from various GE divisions to push the conceptual framework. GE has even, after complaining about high taxes in Connecticut, moved its headquarters to the even higher tax town of Boston, Massachusets, to tap into the northeast’s software resources.
So far this has had minimal impact on GE stock. The stock is down 4% so far this year, but that does bring its yield up to 3.13%. However, earnings need to start kicking in because the 92 cents/share dividend which GE declared in 2015 is not backed by earnings, which were negative in the last year.
Immelt’s letter to shareholders targets earnings of $1.45-1.55/share for 2016, which would easily clear the dividend and he plans to buy back $18 billion more in shares, resulting in a total capital disbursement of $26 billion. He whines about government relations as “the worst I have ever seen” (a lifelong Republican, Immelt served on an expert board for Democratic President Obama, drawing the ire of conservatives), but then insists the company won’t complain about it or blame the government for poor performance. The hope is that the turbine business of Alstom, which was finally acquired last year, and restructuring can get earnings where he wants them, and uncertainty elsewhere in the market will lead investors to the safety of GE stock.
In the long run, it’s a compelling story. The problem is that Immelt turned 60 last month, and may not have a long run left at the top. GE has long maintained a retirement age of 65 and given each new CEO time to transform the company, as Immelt did. There is no assurance that his successor, whoever that might be, will continue along the same path.