Nostalgia is fine, but it’s not an investment strategy.
If you’re buying General Electric (NYSE:GE) today, you’re buying it based on nostalgia. The current company is a mess, mostly a power unit, that was once France’s Alstom, whose acquisition was said to be its “best deal ever” when it closed in 2015.
Alstom is now called a “headache,” but it’s more like a cancer. GE is having to pay another $3.1 billion for worthless joint ventures whose potential acquisition was part of its original deal. The deal made GE the biggest maker of giant gas turbines.
Our Neil George had a close-up view of all this, as it happened, but you didn’t have to be close to it to see that former CEO Jeff Immelt’s strategy was wrong, even contradictory.
Immelt’s Folly
Immelt will go down in history as one of the worst CEOs ever. He had what sounded like a good idea, to make General Electric and GE stock great again, instead of the finance-and-entertainment conglomerate Jack Welch had made it. But the idea was stupid on its face.
Consider that at a time of rising efficiency, with renewable costs declining, which Immelt could see because GE Power had a large wind turbine operation, he buys power generation and big engines.
He also creates a “cloud” called Predix designed to make power systems even more cost efficient. Predix, by the way, has saved as much money for customers as Immelt thought it would. The problem is that’s money they’re not spending at GE.
What did he think was going to happen to demand for engines when he was selling greater efficiency into nominal growth? On top of that, he doubled down on oil and gas, buying Baker Hughes after Halliburton (NYSE:HAL) failed to do so on antitrust grounds, creating Baker Hughes (NYSE:BHGE), a stock that is down 15% since its birth despite oil rising to $70 per barrel.
Again efficiency, the very trend Immelt was touting on one hand, was behind BHGE’s trouble. Technology has made oil a lower-risk, but also lower-employment and lower-profit, business. Anyone with a brain should have seen this, but Immelt refused to.
What’s Left
John Flannery, who was doing a great job at GE Health before replacing Immelt, has had to squeeze some lemonade out of these lemons. But he can’t. His plan leaves shareholders with the power business, spinning out the faster-growth healthcare unit and getting whatever it can for its BHGE stake.
GE is also dumping its rail equipment business and merging it with a former unit of the old Westinghouse company valued at $11.1 billion. I have already described the irony of this, since George Westinghouse was Thomas Edison’s fierce rival. In the 19th century.
Flannery has made the most out of a bad hand, but it’s still a bad hand. Bulls can talk up such things as “additive manufacturing” (formerly 3D printing), but it’s still not material to the balance sheet.
GE still needs to earn $1 billion each quarter to sustain a 12-cent-per-share dividend which has already been cut in half. Last quarter it earned $800 million. The falling price of GE stock means that halved dividend still yields 3.7%, but it’s just not safe.
The Bottom Line on GE Stock
GE has one of the longest, and most storied, histories in American business.
But you can’t eat nostalgia. You’re buying Grey Gardens when you do that. Great movie, scary story, but in hindsight even crazier than you thought it was.
You invest money for tomorrow, not for yesterday. Treat GE stock as you would a car accident on the freeway. Take a quick glance, don’t hold up traffic, and move on.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.
