General Electric Company (NYSE:GE) to Redeploy $100 Billion to Industrial Acquisitions and Shareholder Buybacks

September 19, 2016

Senior Portfolio Manager Todd S. Lowenstein of HighMark Capital Management says General Electric Company (NYSE:GE) is restructuring to focus more on its crown-jewel businesses, and is on track to redeploy capital back into acquisitions and shareholder returns.

GE is a terrific example of the type of equity opportunity we seek out. GE has been a relative underperformer for many years now. In the past, it was an empire builder, and during the financial crisis, it got exposed for being heavily reliant on short-term commercial paper financing, essentially funding short and investing long, relying on their AAA credit rating, providing an advantageous funding position. They spent a lot of money building a massive presence in various financial services unrelated to their core industrial business, which resulted in finance at the peak of last cycle becoming close to half their earnings power…

All those financial areas, whether it was real estate, whether it was consumer finance, are being monetized, and the company is being shrunk to fit an attractive set of competitively advantaged, crown-jewel businesses, such as aircraft engines, power generation, health care and locomotive. And they are going to take about $100 billion in capital and redeploy it in industrial acquisitions and shareholder buybacks. They are going to rake in over $100 billion in asset sales and will redeploy that capital back, investing in the industrial businesses, productivity improvements, margin expansion and shareholder returns through stock buybacks and stepped up dividends.

Upside margin improvement is apparent when benchmarking against their peer group and asset return potential, especially on the original equipment side of things as well as on a better recurring services mix, and on capex and operating discipline. We like that the incentive compensation structure for management is being realigned toward an emphasis on returns on invested capital. As a result, we expect an improved margin structure, asset utilization and capital-allocation policies.

So while not an uncomplicated story, however, it is sort of a reset that makes sense to us and that we think is shareholder-friendly. We have some activists now involved in GE who are helping steer the company to the right course, and you have a very handsome dividend yield, so they are paying you as they restructure the businesses for higher and better use. Ultimately, we think this slow-moving transformation will warrant a much higher valuation multiple, higher growth-rate potential, higher-quality earnings, and it’s going to be a very successful investment for our shareholders.

Todd Lowenstein
Todd S. Lowenstein