My GE Manifesto

Let me start by saying my portfolio is very heavy in GE. Anything with a high cost basis (bought in high school) I sold to harvest the losses and the rest has such a low cost basis, I'm not enjoying the tax bill I would receive on the capital gains. Nonetheless, GE is on the top of a very short list of companies I regard with utter disdain. To shorten the length of this post and allow people to converse/debate/tell me where to put it on each of my ideas, I'm going to post my thoughts over the course of 5+ posts in this thread. I'll post twice wait a day before continuing and any moderators let me know if this is not okay.

To start with, there are 5 reasons I dislike GE: treatment of the dividend, stock repurchases, Jeff Immelt, recent strategy change, Alstrom, and my perception of working with them as a company.

To start with, I'm a bit disgusted with GE's treatment of the dividend under Jeff Immelt. GE, when he took over in 2000, was a dividend champion. Jack Welsh was a firm believer in supporting the dividend and increasing it. In my opinion, this is the reason why the Street had so much respect for the company and its shares. Immelt carried the dividend forward until 2009 when the financial crisis happened. The dividend was slashed over 66% at this point. This reaction is somewhat fair as there were rumors that GE was near collapse and management was faced with a major crisis other I never heard the reason why GE let themselves get into such a dire position. A few other companies who held similar preeminence in terms of dividends likewise cut dividends. However, since 2009, many who did cut their dividend or stopped increasing it, have recovered nicely and begun to start paying dividends equal to or greater than their pre-crash level. GE on the other hand, has only succeeded in returning the dividend to ~70% of the pre-crash level. In this it's lagging behind. I could understand that GE is a capital intensive industry and could not grow its dividend as fast, but management has recently announced their intent to keep status quo with respect to the dividend--no increase until at least 2017 while they transition from a conglomerate to a pure industrial and manufacturing industry. What message has this latest move sent? One that is not good. From my perspective as an investor heavily focused on the dividend and its growth, this signals to me that management is not serious about returning money to me directly in the form of cash. GE's dividend is treated as something that is decreased or status quo when management can't manage the company's cash flow. A dividend increase is not something they plan into their strategy nor do they seem to make allowances for dividend growth in their planning. For example, if it was planned into GE's strategy, during their latest transition period, they would suggest its important to them but only raise it 1-2% a year. But no, GE management has frozen the dividend. Also, the phrase at least until 2017 gives me a strong feeling that come 2018 and 2019, my guess is GE's dividend will remain the same.

The conclusion I've drawn is dividends are not a major concern of GE management. Its increase is not planned into their decision making process and when the times get rough, it is first on the chopping block. Also, management is very apt to communicate that their intention to leave the dividend where it is, but will not give a guarantee/backing to increase it at a fixed point in time; thus, showing their hand that does not plan for dividends (a bit of circular logic by me but hopefully you can see my last point). Realizing that cash flow is critical for companies, why not just call it what it is and cut the dividend all together? At least then GE management would not have the ordeal of coming up with cash to pay their investors their share of the company profits directly in cash.

 

My second point is GE's stock repurchase program. GE over the past few years has followed a very aggressive course to repurchase shares. They tout at every investor event how committed they are to re-buying shares and returning value to their investors. The gall of these claims to me is sickening.

Let put something out there. Since GE started repurchasing shares "aggressively", the actual decrease in the number of GE shares has been negative. This means that in over 3+ years of buying shares, the total shares on the market has grown (Disclaimer: this is based on pre-May 2015 numbers). HOW?? If you're buy so many shares then how are there now more shares on the market than when you started? Either you're lying or not telling the whole story. The latter is true. GE has been repurchasing shares rather aggressively, but equally as aggressively, GE management has taken those excess shares as stock options and bonuses. Rather than reducing the number of shares on the market and increasing shareholder value, GE management, through their repurchase program, has put their hand in the trough and transferred value and cash from investors to their own pockets (my opinion).

So to conclude, who are the investors GE management is really committed to? My guess is only a Freudian slip will reveal that it's GE's management. I realize that at every major company, management gets a sweet deal and has the ability to loot a company. I'm fine with that mentality, if some of the loot is actually passed onto the shareholders. The problem with GE is investors are being completely fleeced using a method that usually helps add to their value. I will say, depending on your perspective, GE management dressing up the repurchase program in sheep's clothing is almost genius. Though why the Street has not called them out on it is beyond me.

 

First blush, reading this missile at this very late hour, you've written your ratiionale to dispose of your GE holdings and move into something else. Option #2 find other like-minded investors and fight it out in a shareholder meeting. Perhaps you can interest one of the myriad of business news sources to carry the baton.

FWIW I would just shuffle out of GE and move in, but that's me... too old and tired to tilt at windmills. YMMV.

 

My third reason for my disdain is who heads GE. When Jack Welsh left in 2000, he left a massive conglomerate with vast cash reserves, diversification across many industries, and at the height of the company's powers. The company was really was a the goose that laid golden eggs.

Almost 15 years after Welsh as left, several areas of GE have closed their doors, been sold to other companies, or fallen out of favor. The company has experienced two separate shocks, one in 2001 with the dot com bust and another in the 2009 crisis. During both times, the same individual has remained at the helm, Jeff Immelt.


One could claim that Immelt was setup in 2000 for the dot com bust by his predecessor so at least in part, he should not be blamed. That is fine, but what about 2009? This should 100% land at the feet of Immelt. Though what has been surprising is after leading the company into two major crashes, Immelt seems to have admitted defeat with the recent announcement to sell off major parts of the GE and has decided to reinvent the company. Basically the goose's golden eggs are not enough.


Will this be Immelt's third mistake? Who knows but part of the reason I believe GE was/has been able to recover from the dot com bust and 2009 was its capital assets generated significant profits. Moving forward without these will hinder GE's ability to take market swings and blows. However, should the most recent shift in GE's direction have negative results, it may well be Immelt's last decision. Perhaps I can only hope...