The General Electric Dilemma
Every year, industrial executives (as well as the rest of Wall Street) would travel down to a coastal resort off Sarasota, Florida to hear General Electric’s CEO, Jeffrey Immelt, present his outlook on the company. Last May, Immelt expressed a very positive outlook on the conglomerate’s future, stating “this is a strong, very strong company.”
However, many investors didn’t think Immelt was very confident in his sentiments. His 27-slide presentation went through a 2018 profit target – a highly ambitious $2 per share – that Immelt was still keen on achieving, although Wall Street had already lost faith. When asked about this, Immelt cited GE’s financial performance in the quarters leading up to that day, stating “today, when I think about where the stock is compared to what the company is, it’s a mismatch.”
GE’s stock was trading at $28 per share that day; as of March 9, 2018, it is now trading at $14.94. GE’s sudden fall happened after years of slow and steady growth, as the economy grew and investors gained confidence. However, nobody had more confidence in the company than the company itself; during Immelt’s leadership, GE strived to maintain a feeling of optimism and success, creating a sense of security and performance that wasn’t exactly a reflection of the reality.
According to Deutsche Bank analyst John Inch, “The history of GE is to selectively only provide positive information. There is a credibility gap between what they say and the reality of what is to come.” This was soon realized to be true; Immelt stepped down a few weeks after last year’s conference in May, allowing John Flannery (former VP of GE Healthcare) to take control.
By the end of 2017, under Flannery’s control, GE cut its dividend in half and began restructuring efforts that are projected to eliminate several thousand jobs, with divestitures of over $20B in assets. On top of this, the SEC is currently investigating GE’s accounting practices for certain transactions, including the manner in which GE recognizes its revenue.
In addition to these burdens, GE is currently facing a highly underfunded pension, in fact the highest pension deficit among all S&P 500 companies (a deficit $11B greater than the next closest company on the S&P 500). This can partly be ascribed to extremely low interest rates that have increased pension liabilities globally, as well as years of inattention.
Over 600,000 GE employees (current and retired) could be directly affected by this deficit, and they won’t be receiving their pensions immediately; GE plans to make pension payments over time by assuming $6B in debt to cover mandatory pension payouts through 2020. It’s easy to see the problem here; essentially, the conglomerate is paying off debt obligations with more debt, and this is simply a method of buying time.
As a matter of fact, General Electric had a pension surplus of over $14.6B when Jack Welch (former CEO) was replaced by Jeff Immelt in 2001. Since then, GE allocated much of its capital to mergers and acquisitions and share buybacks. Now, GE has a large mass of workers to support, including over 610,000 people: 298,000 retired workers, 227,000 vested former employees, and roughly 95,000 current workers. GE’s health and life insurance benefits cover an additional 187,000 individuals. In the coming months, General Electric might be resorting to some radical decisions to pay off these pension liabilities, including a possible breakup of the entire company.