GE back to its roots as a world class manufacturing stock

Manufacturing stock General Electric will focus on its technology and advanced manufacturing businesses. It’s disposing of most of its financial companies. It remains a buy for high dividends and long-term gains.

General Electric (NYSE─GE) is going back to its industrial roots focused on its world class manufacturing and industrial internet businesses as a technology stock. It will dispose of most of its capital assets over the next 24 months. The company plans to buy back up to $50 billion in shares. It expects this to offset the earnings impact of the disposal of GE Capital. GE remains a buy for high dividends and long-term price gains.

Chairman and chief executive officer Jeff Immelt said, “This is a major step in our strategy to focus GE around its competitive advantages. GE is today a premier industrial and technology stock with businesses in essential infrastructure industries. These businesses are leaders in technology, the Industrial Internet and advanced manufacturing. They are well-positioned in markets and are . . . achieving higher [profit] margins.”

In 2014, GE’s industrial businesses generated 58 per cent of its profit. By 2018, it expects them to produce over 90 per cent of its profits. This year the industrial businesses are expected to earn from $1.10 to $1.20 a share. That’s up at double-digit rates.

GE is selling most of its financial services providers

GE has done an IPO (Initial Public Offering) of its retail finance business. It’s now known as Synchrony Financial. GE plans to dispose of most of its commercial lending and leasing segment and all consumer lending, “including all U.S. and international banking assets”. These financial sector businesses have ending net investment of $200 billion. The company also expects to sell GE Capital Real Estate for $26.5 billion.

The head of GE Capital says, “The successful IPO of GE’s retail finance business…and other recent business exits have demonstrated that our financial services assets can be more valuable to others.” Canadian banks come to mind.

GE will retain a capital division with ending net investment of $90 billion. This can assist its industrial manufacturing companies by providing financing for the sales of GE products. Specifically, GE will retain Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance.

In the first quarter of 2015, however, GE will take after-tax charges of about $16 billion. This includes taxes on earnings brought back to the U.S., asset impairments and charges on businesses held for sale. On the positive side, $12 billion of these charges will have no impact on the company’s cash.

GE writes that “There is potential to return more than $90 billion to investors in dividends, buyback and the Synchrony exchange through 2018.” It expects to receive $35 billion from the disposed financial services providers. GE plans to spend $50 billion buying back its own shares. It expects to cut its share count to between 8 and 8.5 billion shares. That’s down from over 10 billion shares today. With fewer shares, however, its earnings per share need not fall.

GE writes that it “will maintain substantial liquidity and capital through the transition”. It will not add debt to its retained financial companies for five years. In fact, the company plans to repay about $5 billion of commercial paper by the end of this year. It could make what it calls “bolt on” acquisitions.

GE pays a dividend of 92 cents a share. This works out to an attractive yield of 3.23 per cent. On the negative side, the company will merely maintain its dividend in 2016. It’s nowhere close to regaining its former status as a ‘dividend aristocrat’.

In 2015, GE is expected to earn $1.72 a share—excluding the one-time charge. This would represent earnings per share growth of 4.2 per cent from $1.65 a share last year. This gives the company a forward price-to-earnings, or P/E, ratio of 16.6 times. Next year its earnings are expected to grow to $1.78 a share. This would improve GE’s forward P/E ratio to a reasonable 16 times.

General Electric remains a buy for attractive dividends and long-term share price gains.

 

The Investment Reporter, MPL Communications Inc.
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