By now most investors know that General Electric Company (NYSE:GE) CEO Jeff Immelt is stepping down, ending a 17-year run as the company’s chief executive. His tenure’s been nothing short of disastrous for long-term holders of GE stock.
Of all the Dow Jones Industrial Average stocks that existed when Immelt became CEO on September 7, 2001, and still are in the index today, General Electric is the worst performer of the bunch.
While Immelt couldn’t control either the 9/11 attacks or the economic meltdown in 2008, he clearly didn’t have a magic pill to deliver for shareholders. That’s not to say that Jack Welch deserves all the credit for his 20-year tenure which saw GE stock increase “from $13 billion to several hundred billion.” Those are GE’s words, not mine.
Under Welch’s Watch
The fact is, Welch’s tenure was in an entirely different business cycle than the one Immelt was dealt. In many ways, Welch got lucky taking the reins of the industrial conglomerate at the beginning of an 18-year bull market.
“Welch had lucky timing, Immelt didn’t,” wrote Barry Ritholtz in an article last month on Bloomberg. “The accounting shenanigans at GE Capital under Welch, followed by the financial credit crisis, all but guaranteed that Immelt would come up short. Despite this, many still consider Welch the gold standard for CEOs.”
Investors use a company’s stock price as the ultimate arbiter of success. By that standard, Welch is the winner in any conversation about the two leaders.
However, is that entirely fair?
It’s like saying Mark McGuire or Barry Bonds is the greatest home run hitters in the history of Major League Baseball, conveniently forgetting that both men were on steroids when they hit all those balls out of the park.
Let’s just say that Jack Welch was CEO in the age of steroids and Immelt was the one left to clean up the mess.
What to Expect From New CEO
I think the most realistic expectation is that new CEO John Flannery will deliver shareholder returns that are somewhere between what Welch and Immelt produced. He assumes the post on August 1.
Since Jack Welch took office in April 1981, GE stock has averaged 8.5% per annum through July 11. Over the same period, the Dow Jones Industrial Average delivered an 8.8% annual return.
If Flannery can deliver annual returns in this range (not including the GE dividend), should shareholders be happy?
Absolutely.
That’s because if you’ve been following what the experts are saying, not many believe returns over the next few years will be anywhere near as generous as they’ve been in the past five where the S&P 500 Index averaged almost 14% annually.
Between 1985 and 2014, real returns for U.S. equities averaged 7.9% according to a May 2016 report by McKinsey and Company. In that same report, the management consultancy found that real returns for U.S. equities over the next 20 years could average between 4%-5% annually, well below the returns during Welch and Immelt’s tenures.
If Flannery can cobble together five- or 10-year performance anywhere close to 8%, investors, I would think, would be ecstatic.
Bottom Line on GE Stock
JPMorgan Chase & Co. (NYSE:JPM) recently lowered its 12-month target for GE stock to $22, a level it hasn’t seen since 2013 and well below the share price when Immelt took over back in 2001. The GE dividend is about 2.2%.
“What went wrong cannot be easily fixed,” wrote JPMorgan chief financial analyst Stephen Tusa Jr. in the company’s 133-page note to clients. “Put simply, poorly timed investments to catch up to emerging markets and ultimately optimistic growth assumptions for ‘resource rich’ countries, along with a corporate imperative for market share, has left the company with structural over-capacity, mostly in Power/Oil&Gas/Transportation.”
I would have preferred for GE to have hired an outsider to come in and take a fresh look at its business. Instead, the company chose to promote from within.
If Flannery can make enough good things happen between now and December 31, 2022, to get GE stock back to $40, it would be one of the best turnaround stories of the 21st century.
Unfortunately, I just don’t see that happening. For now, I would look at other industrial giants for investment gains.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
