Start the conversation
General Electric Company's (NYSE: GE) move to bail on its GE Capital finance unit has three obvious advantages – both long and short term – for investors.
First, the schizoid structure of the firm – part industrial, part financial – has been a drag on overall performance for years. Many analysts say the strange marriage worked up until the financial crisis, when it caused the Fairfield behemoth to come under regulatory scrutiny as too-big-to-fail.
But the problems started far earlier. There was the whole Kidder Peabody debacle in 1994, when Joe Jett engineered the biggest trading loss up until that time. Subsequent attempts to jettison the investment bank were hamstrung by the difficulty valuing its mortgage-related assets during the volatility in that space when rates rose.
More importantly for investors, though, is the simple fact that the market discounts financial earnings more ruthlessly than it does industrial earnings, due to the higher potential volatility of the former. Had GE not dumped billions into its financial arm under the guidance of bosses Jack Welch and Jeff Immelt, its multiple today would most likely be significantly higher.
Second, the disposal of the half-trillion-dollar finance unit, beginning with $26.5 billion of real estate assets being sold to Blackstone and Wells Fargo, will provide a war chest for dividends and share buybacks. Its board has authorized up to $50 billion in buybacks – one of the largest programs on record. Investors immediately licked their chops at the possibility, pushing the company's shares up over 8 percent in the first hour of trading this morning.
The disposal of GE's financial assets will also allow it to snap up attractive industrial assets when they come on the market. In March of 2014, the company spun off its Synchrony Financial (NYSE: SYF) credit card business. Shortly before that deal closed, GE paid $17 billion for the power and electrical-grid businesses of France's Alstom SA. GE says "cost synergies" – the Street euphemism for the amount saved by firing employees and closing facilities – will add as much as $0.10 per share in 2016.
GE is late to the party – most industrial or retail companies parted company with their ill-conceived banking forays decades ago (such as when Sears offloaded Dean Witter). Nonetheless, the move has given a welcome goose to the company's previously somnambulant stock price and should remove the distraction of having the Feds peering over its shoulder at every turn.