A week ago, General Electric announced in a press release that the company would be divesting itself of its ailing financial arm over the next two years, a move which is estimated to rake in around $26.5 billion. Here’s what CEO Jeff Immelt had to say:
“This is a major step in our strategy to focus GE around its competitive advantages. GE today is a premier industrial and technology company with businesses in essential infrastructure industries. These businesses are leaders in technology, the Industrial Internet and advanced manufacturing. They are well-positioned in growth markets and are delivering superior customer outcomes, while achieving higher margins. They will be paired with a smaller GE Capital, whose businesses are aligned with GE’s industrial growth.”
When I first heard the news, I got pretty excited; personally I had never really understood when and why a massive and successful industrials company like GE ever decided that it would be a good idea to morph itself into some kind of bastardized banking/manufacturing hybrid, let alone one that brought in nearly half of its revenue from its financial segment. And I’m not trying to be hyperbolic for the sake of colorful language here; in 2014, a whopping 42% of GE’s revenue came from GE Capital, with the remaining 58% hailing from its industrials division.
Now, though, GE’s management has stated that they expect the company’s industrials businesses to generate at least 90% of GE’s revenue by 2018. Furthermore, they plan on using the proceeds from the sale of GE Capital to initiate a massive $50 billion share buyback plan, which would effectively make it the second largest repurchase program in history, second only to Apple’s obscenely massive $90 billion buyback plan.
Honestly, I think that getting rid of GE Capital is a smart move. Indeed, the violent rectal pounding that GE Capital gave to its mother company during the Great Recession undoubtedly made poor Tommy Edison turn in his grave, and memories of the stock price withering to a mere $5 (and taking nearly 70% of its dividend with it) will not soon be forgotten.
Unfortunately, my excitement at what was seemingly good news was short-lived when I then read that GE would also be freezing its dividend through 2016. With EPS growth relatively flat in the last couple of years and a payout ratio already teetering on the edge of 60%, I understand the company’s rationale behind this move as a way of preserving itself during the coming transition period as it sells off GE Capital; however, as sound as the reasoning behind the freeze might be, as a dividend investor I can’t help being disappointed by it. After all, the source of the incredible power of dividend investing lies in the marriage of high yield and high growth of yield (or, for a few exceptions, a low yield but with a phenomenally high growth of yield to make up for it). Sure, GE has a pretty fat yield sitting in the vicinity of 3.4%. But a flat dividend growth rate for the next 2 years? The thought just makes me sad. 🙁
Of course, one could argue that if GE starts aggressively increasing its dividend in 2017 and beyond it could still lead to a strong compounded annual growth rate over the next 5-10 years. Honestly though, I don’t feel too confident in making that bet, and, given the fact that I am still early in my wealth-accumulation phase, I would much rather have a steady annual growth rate rather than a strong compounded annual growth rate composed of troughs and peaks.
So that’s kind of where I’m at right now in regards to GE. I’m still not 100% certain that I will sell my shares, but I do feel as though I could find another similarly-yielding company that won’t come with a frozen dividend attached to it and that will make for a better place to park my cash in. Plus, I can always re-initiate a position in GE down the road if and when it thaws its dividend. And with the stock up nearly 10% since the announcement last week, I could exit with a massive fortune tiny profit. But a profit nonetheless!
What do you think about the situation? As a dividend investor, would you sell your shares of GE right now, or would you hold on to them? I’d love to hear your thoughts in the comments.