GE Selling Financial Arm - Jury is Still Out

11 Apr 2015 13:04

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On Friday April 10, 2015, GE announced it is exiting the financial industry by divesting the last of its financial division for $26B. The markets immediate reaction was to drive the stock price up just north of 10% as investors were pleased to see GE returning to its industrial roots. But is it the right move?

I've been a shareholder of GE for sometime so the news was important to me. The signal that sends worries down my spine was Jeff Immelt signaling most of the proceeds will be returned to shareholders in the form of share buybacks. On the surface this sounds shareholder friendly but from my perspective this is the worst use of money.

The finance arm of GE made a lot of money for GE and what will fill that gap? This is such a short term gain and I'm looking for an investment that has legs to keep it growing for the next 20 or more years.

What I want to hear is hear is how they will improve margins and grow revenue. Without these how do you maintain long term dividend growth. I realize it is early so I'll wait and see if they develop a strategy but for now if Jeff Immelt or GE's board of directors are reading this post here are some ideas on how to spend $26B:

1. Pay down expensive long term debt
There is about $7B in long term debt with rates just above 5%

2. Issue a special dividend to shareholders
How about 25 cents per share

3. Make acquisitions with better margins and growth rates
Here are few examples:

  • AO Smith Corp (AOS) market cap $5.8B
  • Calgon Carbon Corporation (CCC) market cap $1.14B
  • Federal Signal Corp (FSS) market cap $1.01B
  • OSI Systems (OSIS) market cap 1.47B

So there its. GE you are officially on notice! You have till the end of the year to come up with a strategy of how how you will use the proceeds to improve the business and not manipulate share data.

In regards to discloser I have no positions, plan to buy or interests in AOS, CCC, FSS, or OSIS.

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