It’s hard to believe that the darling of the investment world, General Electric Company (NYSE:GE) has become a total disaster. There are many reasons for this. Regrettably, former GE stock CEO Jeffrey Immelt did not have the vision or execution to handle this massive conglomerate.
To a certain extent, he rested on the company’s laurels. As a result, after setting its record high of $57 some eighteen years ago, GE stock is now 70% below that price, even as the S&P 500 (NYSEARCA:SPY) has soared.
GE stock hasn’t been growing earnings for quite some time. Its businesses have flagged. It’s a bit like, well, the Titanic as it sinks.
The first sign of trouble came during the financial crisis. Now every company got slaughtered during the financial crisis, but I was particularly surprised that GE cut its dividend.
My mistake was I had taken my eye off GE. I took it for granted that GE stock was an all-weather winner, and that it would survive all storms.
For the first time in my investing life, I discovered that anyone who called a stock a “blue chip” and equated that word to “safe” was making a huge error.
That’s just one reason why my stock advisory newsletter, The Liberty Portfolio, avoids overpriced “blue chip stocks” and instead builds a portfolio around low risk and low volatility.
Not only has General Electric stock been flailing because it can’t seem to keep up with a world rapidly advancing via technology, but now the rock-solid reinsurance business has imploded.
Insurance is a fantastic business. However, GE got hammered when its insurance business announced it would take a $6.2 billion after-tax charge in Q$4, and would have to boost its reserves by $15 billion over the next seven years.
And that’s over the long-term care insurance portfolio it already divested. For those paying attention since way back in 2005, one of Immelt’s first plays was to spin the insurance business into Genworth Financial (NYSE:GNW).
A few astute analysts knew that, some day, the massive liabilities would have to be dealt with because they remained on GE’s balance sheet and not Genworth’s, but most didn’t pick up on it. In fact, even Moody’s didn’t see it coming.
That means GE Capital will have to fund those reserves which means it cannot throw dividends up to the parent. What a disaster.
This now affects everything else at General Electric. I assumed that GE Capital’s Aviation Services division would be sold off to raise cash. Instead, the cash flow it throws off is necessary so the division will probably stay put.
This, by the way, is the reason why I hate share repurchases. For many years, GE stock has been buying back its own shares, much like other companies do.
Yet most companies buy back stock at prices that are way too high. A company should buy back its stock when it is actually cheap, not because it has capital and announces, “Hey we think our stock is cheap.”
Yet companies want to boost the apparent EPS number each quarter by lowering the share count, as if that actually fools anyone. Well, GE has spent $21 billion over the past many years to buy back its expensive stock. It sure could use that cash now!
GE still makes money and one day GE stock will be worth buying again. Personally, I wouldn’t go near it until it hits $10 per share, and even then, I’d be cautious.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
