Will General Electric Company (GE) Use Its Cash To Buy Other Companies?
General Electric Company (NYSE:GE) delivered mixed financial results for the fourth quarter. However, there are reasons to be optimistic about the company as it completes the divestitures of businesses and becomes a more focused manufacturing company. Over the last decade the company had been branded more like a financial institution or bank and thus came under the severe rules and regulations of the Federal Reserve. Since the financial crisis, the business conglomerate has been involved in a variety of efforts in order to shake that designation. In addition to freeing itself from the regulations, it has the potential to collect more than $150 billion cash once all its efforts have succeeded.
These divestments by General Electric Company (NYSE:GE) were focused on a few issues that the company was fully aware of it. The company was narrowing its focus and trying to be involved more in core operations. That will enable the company to use its cash to acquire other companies, raise its dividend, and buy-back shares.
How The Company Will Get More Cash
General Electric Company (NYSE:GE) is a business conglomerate having an interest in different fields. In a nutshell, they had their presence in areas including healthcare, aviation, transportation, oil and gas, energy management, power and water, lighting, appliances and GE Capital. One of the important segments was the financial sector, i.e. GE Capital operating in the commercial lending, as well as, leasing, real estate, consumer, GE Capital Aviation Services, and Energy Financial Services. Its presence was wide around the world.
As long as General Electric Company (NYSE:GE) was immersed in financial business, it had to comply with SIFI regulation. Now that the company has indicated its intention to apply for removal of the SIFI designation in the first quarter of the current year. When achieved, the company stands to gain from less regulatory procedures. It would free some of its resources, including cash. In the year 2015 alone, the company has signed $157 billion worth of divestments. The business conglomerate revealed that $104 billion worth was closed in the last year with the balance remaining to be closed in the current year. That was ahead of its plan by a year.
List Of Companies Sold
Let’s us look at the list of companies or the portfolios that were divested in the last year. The business conglomerate started with selling its property portfolio in April last year that was valued at $26.5 billion. This was followed by big divestment news. In April itself, the company indicated its intention to exit most of its financial unit with an intention to slash down its holdings. Banking firms have suffered from lower multiples then manufacturing plays as regulation has bogged them down.
In August, General Electric Company (NYSE:GE) decided to divest its Healthcare Financial Services businesses for $9 billion. In the same month, the conglomerate decided to sell its on-line deposit platform for undisclosed terms. In the following month, its GE Capital sold its transportation financing uni with $8.7 billion in assets for an undisclosed sum.
The Possibilities Of Using Cash
It is now clear that General Electric Company (NYSE:GE) has already received $104 billion most of it because of GE Capital divestitures. The company indicated that its liquidation position was $91 billion. It should be noted that some portions of the money are said to need repatriation thus carry some restrictions for use in America. One of the primary factors that investors would not have noticed was the debt originally issued by GECC. Aside from paying down the debt, the company could still consider acquiring some companies or boost share repurchase or dividend. For the year 2015, the company claimed it returned $25 billion of capital and planned to return $18 billion in the current year and $13 billion in the next two years, i.e. 2017 and 2018.
If the company were to make acquisitions they would be focused on making its non financial businesses stronger. The company remains a diversified conglomerate and this leaves many fields in manufacturing that could be boosted.
Whenever there is an insider buying, then it is bound to interest investors. General Electric Company (NYSE:GE)’s SVP has acquired over $1.8 million worth of shares most recently. That meant he would have purchased more than 65,000 shares. That gives some room to expect something positive from the company if not immediately but, at least, in the second half of the current year. The removal of SIFI designation would allow the company more leverage. The company could also use the cash to boost its dividend, which already provides a yield of 3.2%. The company’s average payout for the five-year period was 55.0% while the latest quarter’s ratio was 60%.
There could be three ways that General Electric Company (NYSE:GE) could use the cash including acquisitions, boosting dividends, or buying back its shares. It’s very likely that the company will undertake a combination of all three which will only benefit shareholders and create a stronger General Electric.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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