GE’s Finance Unit: Maybe Jettisoning It Is a Bad Idea, After All
There’s been little love lost between General Electric (GE) investors and GE Capital Corp., the financial unit that wiped out a huge chunk of the industrial conglomerate’s value in post-9/11 years. Calls for GE to sell off huge parts of the finance division, which is essentially one of the country’s biggest banks, still reverberate among investors who want a more straightforward industrial play. But ironically, GE Capital is a key reason GE shareholders are a lot happier today than they were this time last year.
GE Capital is posting its best financials in years, and it is showering GE investors with the fruits of that bounty. The capital side recently paid GE a $4.5 billion special dividend, and it reinstated a $475 million quarterly dividend to the parent company. Going forward, GE Capital will pay 30% of its earnings as dividends to GE, which adds up quickly in a business that reported $2.12 billion in segment profit last quarter alone.
That’s about 36% of total segment profit for GE, and the money has gone toward rebuilding a corporate-level dividend that was cut in 2009 -- the dividend yield, at nearly 3%, isn't bad -- and to reinvigorating GE’s share price with stock repurchases. Both efforts have helped drive up GE’s share price to 52-week highs.
While this is all good news, the rebound at GE Capital doesn’t get to the heart of the problem for many investors; aka, that banking is a different kind of risk than making jet engines and wind turbines and the like, and they want no part of it. This odd coupling still dampens enthusiasm for the shares in some circles, even as the industrial side of GE has started growing again.
GE Capital is, in fact, shrinking under management’s concerted effort to make GE more about manufacturing and less about finance. Since 2007, when GE Capital contributed almost half of GE’s operating profits, the percent of revenues GE gets from the capital group is down to about 31% from 39%. Most of that decline comes from sales of units like overseas mortgage lenders. Parts of GE Capital will always be around because they help GE sell its very expensive products by financing them for customers, but the business still has lots of unrelated units. In July, for example, it collected $2.51 billion for a commercial real estate business that specialized in buildings owned or leased by small to mid-sized companies. A consumer finance division includes huge consumer credit card operations, and that, too, may be up for sale. (GE hasn’t specified, but it’s generally thought that anything unrelated to running industrials could go.)
Profits and capital have been restored in all of the GE Capital segments, and the cash from these is funding a nascent recovery on GE’s industrial side. Investors are excited about growth potential on the industrial side, which is looking at smallish acquisitions financed with the windfall from GE Capital.
Many long-time GE investors, some of whom still hold shares worth 40% or more less than where they bought them, haven’t forgotten that their losses are mainly the fault of GE Capital. Selling off a lot of GE Capital operations now that they’re worth something again probably sounds like great good riddance. Then again, the consumer division alone of GE Capital brought in about 15.5% of the GE’s total segment profit last quarter. Be careful what you wish for.