A Slimming Giant

By Malcolm Berko

December 31, 2014 5 min read

Dear Mr. Berko: You once recommended General Electric at $25. I didn't buy the stock, because the company was so big that it reminded me of the Pentagon. Would you still recommend a 200-share purchase? Also, what is your opinion of Synchrony Financial, which GE spun off in July? — GS, Kankakee, Ill.

Dear GS: General Electric (GE-$25.40) is slimming down and becoming better-focused. In the past decade, GE has been one of the worst-performing stocks included in the Dow Jones industrial average. An October survey of several dozen fund managers revealed that they believed that GE was "uninvestable, unmanageable, too complicated, too diverse (and) too slow." And several "buy and hold" fund managers admitted they're frustrated with the stock's performance. It seems they and other investors are shunning GE in favor of smaller, less convoluted conglomerates, such as Textron, Honeywell, Danaher and 3M. And Scott Davis, an analyst at Barclays, told investors in November that GE's earnings reports are so confusing it takes him "days to fully digest them." I recall a frustrating hour trudging through those reports in March, when I recommended GE at $25.

Though in fairness, GE did spin off Genworth Financial (GNW-$8.46), its $10 billion-revenue life insurance and financial services company, at $19.50 a share in 2004. Three years later, GE got out of the plastics business, selling it sock, lock and barrel to a Saudi firm for $11.9 billion. Then, in 2013, GE sold its media business, NBCUniversal, to Comcast (CMCSA-$58.92) in a deal valued at $40 billion. And recently, GE sold its iconic appliance business to Electrolux in Sweden and simultaneously purchased the power generation business of the French conglomerate Alstom. If the board decides to go the full monty, Barclays says GE should spin off everything that's not related to its global infrastructure-related businesses — energy, aviation and transportation. So another spinoff may be GE's medical devices business. This unit should be worth enormously more as a stand-alone entity, and Wall Street believes that it will trade at higher multiples than competitors Johnson & Johnson, Stryker and Medtronic.

GE may have most of its spinning out of the way. Still, its share price did diddly squat last year, as it had in the dozen previous years. Meanwhile, 21 percent of GE's industrial revenue is exposed to plunging energy prices — primarily those divisions making equipment that drills, pumps, measures and transports oil. So GE's power generation business will be hit hard if oil prices remain weak. And continued lower oil prices will slam the fortunes of oil-producing countries where GE hopes to grow its revenues. However, the 88-cent dividend may be raised to $1 in 2015, and with alacrity, I'd buy GE as a conservative long-term investment yielding 3.5 percent.

Synchrony Financial (SYF-$30) was previously a part of GE Capital. GE hired Goldman Sachs, Morgan Stanley, J.P. Morgan and Citigroup to take 20 percent of Synchrony Financial public at $23. The underwriters did a yeoman's job, offloading 125 million shares, which steadily rose to $30 a few months later. GE still owns 80 percent of SYF's shares, which may be distributed to shareholders at some point in 2015. SYF is the largest provider of private-label credit cards in the U.S., based upon purchase volume and receivables. SYF also has an inventory of credit products (personal loan plans) through programs established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations, veterinarians and health care providers. In 2014, SYF posted $6.2 billion in revenues, with net profit margins of 32 percent, and earned just under $2 billion, or $2.20 a share. Low oil prices, which may continue for 12 to 18 months, are bullish for SYF because most Americans don't bank their savings; they usually spend and borrow more. And Synchrony will be Johnny on the spot, assisting buyers and sellers in financing their transactions. SYF doesn't pay a dividend, but that may change soon because the balance sheet has $14.8 billion in cash, which is equivalent to $17.50 a share.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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