GE, in a move to become a pure play industrial company, is exiting the financial services business by selling the bulk of the assets contained in its GE Capital unit and returning most of the proceeds from that disposition to shareholders in the form of a $50 billion share buyback.
GE shares rose more than 8 percent in premarket trading. (Get the latest quote here.)
The company will take an after-tax $16 billion charge in the first quarter of 2015 in connection with the divestiture of GE Capital. Roughly $12 billion of that charge, which includes paying taxes on repatriated earnings, is non-cash.
GE said its intent is to create a “simpler, more valuable company” by effectively disposing of a unit whose assets are equal to that of the nation’s seventh largest bank.
It will do that by selling units to other financial institutions as well as portfolios of assets, including Friday’s sale of its commercial real estate assets for $26 billion. GE will sell most of the assets of GE Capital Real Estate to funds managed by Blackstone and Wells Fargo.
GE will keep the financial operations that help its customers finance their purchase of equipment from GE.
While the company has considered shedding GE Capital for a number of years, Chairman and CEO Jeff Immelt, in an interview with CNBC, said now was the ideal time.
“You really have a perfect market to be selling financial service assets, so you’ve got slow growth, low interest rates, lots of liquidity, people searching for yield,” Immelt said. “We think it’s good for the regulatory world, it’s good for investors. And that’s been more or less recent. Now’s the time to do it.”
GE expects to return more than $90 billion to investors through 2018. While parts of that return include the current dividend and the spin of its remaining 85 percent stake in Synchrony, the bulk will come in the form a $50 billion share repurchase program that will shrink its share count to as little as 8 billion by 2018.
“Our intent is to buyback stock and that gives an investor in GE the chance to say they’re going to get the same EPS as we execute this plan as they did before, only with a better mix,” Immelt said. “it just felt like that was the right formula for us given where we are today.”
The new GE is starkly different from the company it was only a few years ago. Gone are NBC, appliances, plastics and now GE Capital. In their place, Immelt has created a portfolio of industrial companies that he believes can provide the growth characteristics that investors will reward with a higher multiple.
“I love this high-tech infrastructure space where we think we have a real, competitive advantage,” Immelt said. “Everything that we’re in today we are both competitively advantaged in and we’re good at.”
By 2018, GE expects that more than 90 percent of its earnings will be generated by its industrial businesses, up from 58 percent in 2014. It is a significant change for a company that relied heavily on its financial assets to fuel its growth, until the financial crisis came along.
Will the changes be enough to lend some life to a long suffering stock price? Immelt says yes.
“I think this is a great stock to invest in right now,” he said. “You’ve got a tremendous industrial company and a chance to re-rate the whole company as a premier industrial company. You’ve got a fantastic set of cash flow options for investors coming at you, between buyback and dividend. And I think we’ve got wind at our back in terms of selling these financial assets. That’s an extremely good one, two, three punch for investors.”