General Electric Company (NYSE:GE) dates back to the invention of the light bulb Thomas Edison and his team. In 1889, Financed by JP Morgan (the man) and the Vanderbilt family through Morgan’s investment banking arm Drexel Morgan, Edison combined electric motor maker Edison Machine Works, lighting fixtures and socket maker Bergmann & Co, and the Edison Electric Light Company.
It basically vertically integrated the newborn electric light industry in one fell swoop. The Edison General Electric Company had all the means of production from the power stations to the light bulb and everything in between.
In 1896 it was one of the original stocks to be listed in the Dow Jones Industrial Average and is the only stock from those 12 that is still listed in the average today.
Since then, it has spread itself across a number of industries including transportation (trains and airplanes), energy (nuclear, renewables), healthcare, credit and other infrastructure sectors.
It’s the latter sector, credit, that is the most important and newsworthy now.
GE: Too Big to Fail
Before current CEO Jeff Immelt took over the helm at GE, it was run by the legendary Jack Welch. Over his reign at GE from 1981 to 2001, Welch saw that the credit business was becoming a very lucrative market.
GE had always had a financing arm since you don’t write a check for a nuclear reactor or a dozen train locomotives. But as the debt markets became the place where traders were finding new ways to package debt to make money off it, Welch saw an opportunity.
He began to buy debt by buying companies that were holding other people’s and companies’ debt. And the Credit division work well for a long time. And being a $286 billion company by market cap, that has a global reach unlike most other countries, it built a significant credit portfolio.
And then 2008 happened. Its stock price went from $41 to $9 between late 2007 and early 2009. Its massive amount of debt went from wings to a millstone around its neck.
Once the dust had settled and the government and regulators stepped in to make sure this financial meltdown wouldn’t happen again, GE, because of the size of it debt holdings it was designated a Systemically Important Financial Institution, or “SIFI,” an acronym for “too big to fail.”
SIFI companies have even more stringent reserve requirements than non-SIFI financial and non-financial companies. It is not a designation you want if you’re not a financial institution or insurer.
Well, earlier this week, the U.S. Treasury Department lifted its SIFI designation on GE.
Bottom Line on GE Stock
Immelt has spent years now unwinding GE’s massive credit exposure, selling huge blocks along the way. The goal is to make the GE credit division function to support its key businesses and little else.
This is a huge step for this industrial giant. Add to that the growth in renewables, where GE is a major player; the demand for healthcare equipment in China; and the launch of its Predix industrial smart software, and you have a very interesting engine of growth for the next century.
The stock is slightly underwater year to date, but GE has restored the light for the next century. Its 3% dividend is a great bonus as well and may get bigger now that it has shed its SIFI label.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
