What a nightmare. What a fall from grace. General Electric Company (NYSE:GE) may go down in history as being one of the greatest companies to ever take a face-plant under a CEO who rested on his laurels. GE stock is now at $14 and could go even lower.
There are so many problems, but first I’ll focus on what was really nothing more than cynical financial engineering.
Stock Buybacks
Three years ago, GE decided it would spend $50 billion on stock buybacks. I said at the time this was a dumb idea because General Electric stock was overvalued — and it wasn’t growing organically. I hate, hate, hate when companies do this. They call it “returning money to shareholders.” I call it “wasting shareholder money,” because they almost always buy at prices that are too high.
General Electric stock was way too high at the time.
So, now, General Electric has spent almost $30 billion buying back shares at an average price of $30 per share… and GE stock is trading at $14.
Nice going.
GE lost $15 billion of shareholder’s money. It could have increased the dividend or, better yet, not spent the money at all. Oh, but wait, it gets worse.
Selling Off Assets
GE offloaded GE Capital and it became Synchrony Financial (NYSE:SYF) and the portion of SYF it gave up has gone up in value by about $4.5 billion.
Nice going.
So, should GE throw good money after bad and continue with the buyback, now that shares are lower?
No way!
Where General Electric Stock Stands Today
First of all, when you look at the actual net loss for the latest quarter, it was almost $4 billion — not the reported GAAP gain of $9 billion. Free cash flow is barely enough to cover the current dividend, at about $4 billion. Any cash GE stock does have on hand has to be set in reserve, because it is still responsible for some huge problems at what was once its insurance subsidiary. GE got hammered when its insurance business announced it would take a $6.2 billion after-tax charge and would have to boost its reserves by $15 billion over the next seven years.
Worse still, GE stock has a pension fund and it is underfunded to the tune of $6 billion. It has $66 billion in long term debt.
So now, here we are at a point where General Electric stock should be repurchased — and the company blew through the money it really needs.
Does that mean GE will go for an equity raise? A few analysts seem to think so. GE just kicked out eight directors and brought in three new ones. They may like that idea. Alternatively, Warren Buffett suggested that he may be interested in smaller pieces of GE.
“If we like the business and the price was right, we could write a check for cash,” Buffet said. “And that would apply to GE. They’ve got a few big businesses. I don’t think they want to sell them, but they have some smaller units that they’re interested in selling. But we’re always in the market for a big business that we can understand and that we like, and we think that we’ve got the management for and so on.”
It’s a disaster all around. Stay on the sidelines and get out if you haven’t already.
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 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
