On General Electric's Downfall
Few companies in American or even global history have a story to tell like General Electric. From its founding by one of the legends of industrial progress throughout the 20th Century, this company could boast of touching the life of every living soul on earth in some way.
Years ago, my parents used to subscribe to a publication called "Value Line." Each week, it would review industries in a specific sector with a thumbnail sketch of each company, with a recommendation for "Value" and "Timeliness" on each stock, rated from a high of 1 down to 5. GE was always a "1" for both. Because of a consistent growth pattern shown over decades, in Value Line's view, there was never a bad time to buy it, and it never represented a bad value. For an investor in the market, that was all you needed to know.
And the firm delivered. Year after year, you could practically set your watch to a dividend hike. And if you were patient, as those dividends went up, at your cost basis, you eventually got a return that matched junk yields without losing a bit of sleep on asset quality, while your share value increased along the way. If you were smart, you reinvested the dividends each quarter and compounded your gains. It didn't take much for the average middle class American to take a share in corporate wealth. People who took this path with even modest stakes to start with were well rewarded.
GE was emblematic of the American "conglomerate" style. It had a hand in everything. Most Americans were familiar with the firm for their appliances, so their brand was displayed in some way, shape or fashion in almost every American home and quite a few foreign ones. Its credit arm was established to facilitate the purchase of those appliances, and it became a lending powerhouse on its own. It started the Radio Corporation of America (RCA) along with AT&T. It developed the first jet engine, a business it still has a major role in. It developed the first solid state laser. It had a plastics division that invented Lexan.
But GE's increasing reliance on its Finance Division, tells an all too familiar story in corporate history, as for a time, this paid off very handsomely, until of course, it didn't. It also made some bad decisions overpaying for new acquisitions, notably a stake in Baker Hughes Oil & Gas in the midst of the fracking frenzy, and Alstom, a European turbine and power company.
"This acquisition is a brilliant one because the world is going to switch to cleaner power plants, and now GE has a hammerlock on the business," said TheStreet's Jim Cramer, portfolio manager for the Action Alerts PLUS charitable trust."
Today, the Alstom acquisition is an albatross around GE's neck. The GE Power division, which began with Edison's light bulb, is seriously underperforming, and is the key reason for GE's debt being downgraded to A2 by Moody's, which for a company with such proud traditions is quite humbling. Perhaps more humbling is that the dividend was cut in half that same week. No word on an "Action Alert PLUS" for that event.
There are dozens of histories on GE's rise and fall on the web. It's the debt we want to talk about. Last summer, an analyst noted that GE's substantial debt stack wasn't much a worry for a company with a market cap of over $350 billion. Now that the market cap has been sliced to $127 billion today, that calculus might have to change. In the tradition of latter day American corporate incompetence, the firm also spent $10 billion buying back its stock as opposed to using the funds to retire its debt, a tribute to the perverse incentives baked into our economy. Damned Chinese....
From a high of $112.55 on September 6, 2017, these 2044 maturity bonds, with a mere $2.25 billion outstanding, have today sunk below Par to about $98.80. My screen lists 380 individual General Electric related debt issues. This is just ONE of them. The company has a formidable task ahead in managing this risk in what will probably be a rising rate environment. And the fate of some 300,000 employees in 175 countries who will depend on the firm navigating this challenge, hangs in the balance.
