Judging by the market’s initial reaction, General Electric (GE) should have gotten more from Capital One Financial (COF) when it sold its healthcare financing business for $9 billion, but that’s nitpicking at its finest when it comes to General Electric stock.
General Electric stock fell in after-hours trading yesterday on the news, while COF spiked, but none of it matters today. Everything is selling off Wednesday as part of China’s devaluation of its currency.
More importantly, whether General Electric left a few billion on the table is immaterial at this point. All that matters is that it sells its financial assets as quickly as possible without taking a beating on price.
The sooner it disposes of the once-mighty GE Capital business, the better. GE believes it can excel as a much smaller, pure-play industrial, and we tend to agree.
Sure, GE Capital once contributed as much as half of GE’s profits, but it threatened to scuttle the company during the financial crisis. What’s worse, it put GE under the microscope of the Federal Reserve’s oversight as a systemically important financial institution.
No company want to operate under stricter supervision and restrictions, and that goes double at a time when the financial business is constrained by near-zero interest rates, new regulations and a mediocre environment for lending.
The sale of the healthcare financing unit allows GE to reassure a market that’s betting on its transformation to a pure industrial. As Keith Sherin, CEO of GE Capital, said in a statement:
“We are on track to reduce our ending net investment by $100 billion by the end of 2015 and expect to be substantially done with our exit strategy by the end of 2016.”
That’s what GE bulls are counting on, and the latest move should keep General Electric stock moving along.
GE Is Getting Smaller Fast
Among other deals this year, GE sold $26.5 billion worth of office buildings and commercial real estate debt to Blackstone Group (BX), Wells Fargo (WFC) and other buyers. GE previously spun off its private-label credit cards and retail-finance businesses into a separate company, Synchrony Financial (SYF).
In addition to putting tens of billions of cash directly into investors’ pockets — which is almost always good for some shorter-term upside — the sale of financial assets make General Electric stock more attractive as long-term holding.
No longer will GE be an out-of-favor conglomerate comprised of disparate business that all cycle at the same time. Rather, it will be a simple industrial stock, trading on sales of things like jet engines, turbines and CAT scanners. That means investors will know exactly what they’re getting with General Electric stock.
GE has cooled off since it springtime spike on the GE Capital plan … but this is a long-term process, after all.
General Electric hasn’t been a hot stock since the days of Jack Welch, and that’s just as well. As a pure-play industrial, it’s going to be more boring than ever — with steady, unspectacular growth and an ample dividend.
After a rocky decade-and-a-half, that’s exactly what GE shareholders need.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
