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General Electric Should Go Away

August 29, 2018

Too many public companies like to take their individual investors for granted while they’ll kowtow to institutions and Wall Street analysts. And of course, when push comes to shove, sometimes they’ll lower themselves to deal with an activist investor if their lawyers tell them that they must.

But when it comes to individual investors, it usually just comes down to “trust us, we know better.” However, as a former banker and fund manager — I do know better. And when it comes to General Electric (NYSE:GE), this company has been a mess for individual investors for a long time now.

For years, I was the editor in chief of what was then one of the largest newsletters by subscription, Personal Finance. I enjoyed my job then just as I do now as editor for Profitable Investing. And what I most appreciate is that I get to speak truth to power when I see management that’s not focused on shareholders while guiding subscribers to the better-run companies.

Back many years ago, I still recall with glee getting called into my publisher’s office at Personal Finance one day on account of a letter that he received from the chief counsel of General Electric.

The lawyers for GE were none too happy about my continued negative views and analysis of the company. And of course, my publisher, like me, was quite happy about the letter.

GE Stock Doth Protest Too Much, Methinks

Queen Gertrude in William Shakespeare’s Hamlet of course is credited with that line which I always love to recall when listening to company management when addressing criticism.

Think of Elon Musk in a conference call with analysts early this year. He was brusque with those that dared to question various assumptions about the prospects for Tesla (NASDAQ:TSLA). And of course, he had to walk his comments back as his company continues to run into further muck.

I’ve been critical of General Electric for years as being a bloated behemoth of a company that cared more for management than for shareholders. And its demise in the stock market is merely the final acknowledgement of the obvious that this company needs to be completely sold off.

GE stock is dead money walking.

Sure, it still has plenty of viable businesses. But they are not benefiting from any sort of combination that has evolved in the conglomerate of the company. It has power plant equipment, airplane engines, some oil and gas field equipment, hospital gear, wind turbines, residual bits of transportation and lightbulbs — and it still has its challenged finance unit.

Together these businesses have plunged in valuation by some 45% in book value since the beginning of 2017. But even now, the collective value of this oddly grouped portfolio of businesses is still valued at over 2 times their actual net asset value. That’s still 100% more than they are worth if liquidated.

Revenues are largely flat over the past year. This is astonishing, as the U.S. economy has been spending heavily on capital investment, propelling many an industrial company to better profits. And from wind power companies to petroleum companies — GE should be cashing in, but it is not overall resulting in little but losses for shareholders.

Margins are in the negatives, with operating margins overall down to -7.3%. This means that the more that it manages to sell, the more it losses. So, no wonder that the return on assets is a loss of 2.3% and the return on what is left of shareholders’ equity is -13.3%.

The dividend was slashed last year in half to a meager 12 cents. But given the plunge in stock price, it manages to yield a current 3.76%.

Now, it is liberating three units via spin-offs — its rail, some of its healthcare equipment and its Baker Hughes oil services stake. But what might make more sense to me would be to put all of the business units up for auction and wrap up the company.

But rest assured, John Flannery’s checks keep flowing to him as CEO. He was paid $1.7 million in cash and another $1.3 million in additional compensation.

GE is not a company for individual investors. It needs to be ripped apart by those in the financial markets that know how to unlock value. Management isn’t part of this crowd. If you own the stock, take the tax loss. And it you don’t, thank the maker that you were spared.

Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.