General Electric (NYSE: GE) has made a number of big announcements in recent weeks. First, the company revealed it would sell off most of its GE Capital arm. More recently, GE announced it would launch the sales process for roughly $40 billion worth of commercial lending assets in the United States.
The commercial lending assets to be sold by GE represent more than half of its $74 billion U.S. commercial lending and leasing portfolio. Clearly, this is a massive deal.
Collectively, these steps represent GE’s broader initiative to rid itself of its financial arm. While some investors were upset at this news, because these financial assets can be extremely lucrative at times, long-term investors should appreciate what the new GE will represent.
Here’s why GE’s moves to sell off its financial assets is a great long-term strategy.
First and foremost, GE will become a much more stable and reliable company. By selling off GE Capital, it will return to its industrial roots. GE’s industrial segment, which includes its aviation, transportation, oil and gas, and health care businesses, are what powered it into the massive conglomerate it is today.
Industrial Businesses: Double-Digit Growth
GE Capital accomplished little but weighed the company down, quarter after quarter. In 2014, GE enjoyed strong growth from many of its traditional businesses. Revenue from GE’s power & water, oil & gas, aviation and health-care businesses increased 11%, 10%, 9%, and 1%, respectively, in 2014. And GE expects double-digit growth this year from its industrial businesses.
By contrast, revenue at GE Capital fell 3% last year. If anything, GE Capital did little to enhance value for shareholders over the long term. GE Capital grew enormously in the years leading up to the financial crisis. In fact, only 58% of GE’s earnings came from its industrials businesses last year.
But at the same time, GE Capital solely brought GE to the brink of total collapse in the Great Recession. The extremely complex financial instruments hidden within GE Capital bloated GE’s balance sheet and over-leveraged the company. At the end of last year, GE held more than $500 billion in long-term debt.
Amazingly, GE Capital, on its own, would be the seventh-largest bank in the United States. The implosion of GE Capital is largely why GE’s stock price fell all the way to $5 per share in the depths of the recession. Then, GE cut its dividend by 67%, from $1.24 to $0.40 per share.
Say Farewell to GE Capital
The bottom line is that GE Capital got too big, too fast, and almost brought down the entire company, even though GE’s industrial businesses remained strong.
Thankfully, the nightmare that was GE Capital is almost over.
After these transactions, GE management expects that by 2018, a full 90% of GE’s earnings will come from its industrial businesses. This is a great moment for investors who want the ability to sleep at night, knowing they won’t have to worry about GE suddenly crashing.
In the first quarter of this year, GE’s industrial businesses grew operating profit by 9%. This was due to a 3% rise in organic revenue, as well as a 120 basis-point improvement in profit margin. These businesses are where GE has a true competitive advantage.
As GE’s revenue and profit become more consistent from year to year, investors should expect GE to once again become a reliable dividend stock. GE only increased its dividend by 4% last year, due once again to poor performance in the financial unit.
Now that GE is refocusing on its higher-performing businesses, higher dividend growth should follow. I fully expect GE to be able to increase its dividend by 8% to 10% per year going forward. On top of its current 3.3% yield, GE once again looks like a strong dividend stock.
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