In fashion, simple is often the sexiest — and most expensive — style. GE Chairman Jeffrey Immelt seems to have gotten the message. By selling off GE’s $200 billion commercial real estate portfolio, Immelt is shedding the once-fashionable finance business that his predecessor Jack Welch used to transform GE from a dowdy manufacturer into a Wall Street superstar, generating a 15X return over the 1990s. He’s returning GE to what has become one of the sexiest fashions on Wall Street these days, a dividend-paying industrial company.
There was always a problem with Welch’s magic, of course: GE was borrowing short and lending long, and sending the “earnings” from that carry trade over to its industrial side as a dividend that investors confused with the earnings from making jet engines and electrical turbines. In the financial crisis, Immelt was unable to roll over GE’s short-term debt and the company skidded to the brink of insolvency, saved only by the Fed’s commercial paper buying program and a $3 billion cash infusion from Warren Buffett’s Berkshire Hathaway — at Uncle Warren’s typically usurious 10% interest rate. GE also was slapped with the label of Strategically Important Financial Institution, subjecting it to onerous federal regulation.
Now Immelt plans to jettison both. In an announcement today, GE said it’s selling its portfolio of commercial real estate and loans to Blackstone and Wells Fargo WFC +0.24% for $26.5 billion. The exit, combined with GE’s spinout of its Synchrony insurance business, will make a “simpler, more valuable company,” GE said. It hopes to shed the SIFI moniker as well.
The drag of the financial business, and attractiveness of a simpler industrial business, is obvious when you look at GE’s performance in recent years. GE’s 10-year total return, according to Morningstar, is an anemic -0.46%. Dow Chemical returned 2.2% over the same period, including its own near-death experience and Buffet bailout in 2009. GE has trailed Dow over the five, three and one-year periods as well. GE returned 13.7% a year over the past three years, for example, compared with 17.7% for Dow and 14.2% for the S&P BMI Industrials Index.
Compared with some other dividend-hiking industrial companies, GE has done even worse. Lockheed Martin has a three-year total return of 35% a year, as it cut costs in the face of declining defense spending and hiked its dividend by 32%. Raiders like Dan Loeb of Third Point LLC have been prodding companies to sell off divisions, focus their operations and increase cash payouts to investors.
GE says it will use the cash from the sale of its real estate business to boost its stock-buyback program to $50 billion. Including the effects of those purchases, which reduce shares outstanding and help increase earnings per share, it says the transaction’s benefits will exceed the $16 million after tax cost.
By pouring the money into buybacks and dividends, Immelt may be following in the footsteps of one of the greatest industrial conglomerate CEOs ever, Henry Singleton, who generated a 23% annual return at Teledyne over two decades by cutting costs and furiously buying back stock whenever he perceived it as cheap.
Read more: Immelt Gives GE A Sexy Makeover — Into Dividend-Paying Industrial
