What Will GE Do With Its Pile of Cash?
General Electric and Comcast announced Tuesday that Comcast will complete the purchase of former GE subsidiary NBCUniversal by the end of the first quarter in 2013, several years earlier than anticipated. Comcast purchased a 51% stake back in 2011 and will be snapping up the remaining 49%, as well as related properties like the iconic 30 Rockefeller office space, for a total price tag of about $18 billion. Added to the $77 billion in cash by the end of 2012, the industrial giant will have a $95 billion pile of money to deploy. What will it do with it?
Part of it will be promptly returned to shareholders. On a call discussing the sale Wednesday morning, General Electric CEO Jeffrey Immelt announced that dividends will continue to grow in line with earnings, a policy the company has pursued since being forced to cut its once-legendary dividend in 2009 by two-thirds, as their overgrown GE Capital unit threatened to bring the blue-chip down in the financial crisis. Since then, the dividend has regained some ground but remains about one-third below pre-recession levels. General Electric would dearly like to restore the dividend in full, and they should do so.
Immelt also announced that an existing share-repurchase program would be expanded to authorize $35 billion in buybacks, with $23 billion remaining. It will accelerate the program to repurchase $10 billion in shares in 2013. I'm not convinced this is wise. Buybacks make sense when shares are selling at a discount, but General Electric just hit a new post-recession high on Wednesday. The aggressive buyback program doesn't seem to based on management's belief that this is the best use of capital, but instead by a desire to "make up" for the nearly 700 million shares it was forced to offer during the recession to remain solvent.
GE officials have repeatedly emphasized their goal of getting the share count back under 10 billion, but this seems to me like closing the stable door after the horse has already bolted. Shareholder equity was diluted, and the company had to offer shares at very low prices. Buying them back now after the recovery, at post-recession record high prices, means that GE has adopted the long-term strategy of selling low and buying high, a highly effective method of setting shareholder value on fire. The only good rationale for buying back shares is the belief that doing so is good allocation of capital because shares are undervalued. GE seems instead to believe in share buybacks as a sort of post-trauma therapy.
More positively for shareholders, GE also plans to continue to grow its core energy infrastructure businesses, both organically and through acquisitions. In the lead-up to the recession, GE Capital got so large that General Electric looked an awful lot like a bank with a captive industrial manufacturing arm, with less than half of revenue coming from industrial businesses. Learning a positive lesson from the ordeal, Immelt determined to shrink the size of the finance business and have it focus on highly profitable lending activity more related to GE's industrial background, like equipment financing and business loans. GE has plowed resources from selling off GE Capital assets, as well as the big chunk of change it received for selling its first stake of NBCUniversal, into growing the energy, infrastructure, and industrial businesses. Management has set a goal of increasing the share of revenue from industrial businesses to 70%.
Most notably, it deployed $12 billion to acquire and integrate a number of small companies to build up its oil and gas business, tripling the revenue of the segment to build a $15 billion enterprise. Oil and gas has been a bright spot for GE, and it was a good long-term strategic decision to muscle into the sector when low natural gas prices left good companies and valuable assets selling for cheap.
Recently, General Electric has been applying the same strategy in the mining equipment sector, and Immelt has expressed the desire to more than double revenue in its mining business from $2 billion to $5 billion over the next few years, through both organic growth and small tuck-in acquisitions. Immelt set a range of $2 billion to $4 billion for new acquisitions, and we'll probably see continued expansion into oil and gas and mining, as well as continued consolidation of aeronautics companies that supply GE Aviation.
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