GE and the myth of "safe blue-chip stocks"

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nisiprius
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Re: GE and the myth of "safe blue-chip stocks"

Post by nisiprius » Fri Jan 19, 2018 4:49 pm

Caduceus wrote:
Fri Jan 19, 2018 4:39 pm
...Last year, I found a company with 2.6x more cash than its market capitalization, and was trading at 0.4 of its book value. Understand what that means. It means a third-party seller could have paid the market price for the entire company, then immediately claim back the cash, and still be left with the company for free. It's like asking you if you would be willing to pay $100 for a wallet with $260 cash in it. Of course you would. And you'd get the wallet for free.

Why did no one on Wall Street buy the firm? Because no one was interested in such tiny companies! Analysts are confined largely to mid-cap and large-cap companies. So the individual investor is free to pick up small-cap bargains, and even better, they are less complex to analyze as they aren't big companies. And even when analysts follow smaller companies, they are trying to set a target price for a few months ahead - which is impossible to do....
So what happened? Did you actually make money on the stock, and if so, how?

Did you actually buy the company and strip the assets?

Did you just wait until the market appreciated the value and finally bid up the prices?

Did you publicize your discovery of the data after buying the company to aid in the market appreciating the value of the stock?

Did you wait for some asset-stripper to buy the company?

Did they invest their cash in capital expenditures that made the company grow?

How did you monetize your discovery?

Or are you still holding the stock, in the sure and certain hope of a glorious resurrection... someday?
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Re: GE and the myth of "safe blue-chip stocks"

Post by Caduceus » Fri Jan 19, 2018 5:21 pm

nisiprius wrote:
Fri Jan 19, 2018 4:49 pm
Caduceus wrote:
Fri Jan 19, 2018 4:39 pm
...Last year, I found a company with 2.6x more cash than its market capitalization, and was trading at 0.4 of its book value. Understand what that means. It means a third-party seller could have paid the market price for the entire company, then immediately claim back the cash, and still be left with the company for free. It's like asking you if you would be willing to pay $100 for a wallet with $260 cash in it. Of course you would. And you'd get the wallet for free.

Why did no one on Wall Street buy the firm? Because no one was interested in such tiny companies! Analysts are confined largely to mid-cap and large-cap companies. So the individual investor is free to pick up small-cap bargains, and even better, they are less complex to analyze as they aren't big companies. And even when analysts follow smaller companies, they are trying to set a target price for a few months ahead - which is impossible to do....
So what happened? Did you actually make money on the stock, and if so, how? Did you actually buy the company and strip the assets? Did you just wait until the market appreciated the value and finally bid up the prices? Did you publicize your discovery of the data after buying the company to aid in the market appreciating the value of the stock? Did you wait for some asset-stripper to buy the company? Did they invest their cash in capital expenditures that made the company grow? How did you monetize your discovery?
Yes, I've made money, but it's only been a year, and investment returns over such a short time frame could simply be due to pure luck. The test will have to be over the long term over several years. In this case, the company eventually used its excess cash to purchase a great deal of its own shares at a huge discount to book value, so the price shot up suddenly. This made sense, because the firm actually had sufficient cash to buy back 100% of its float, and did not require any of it to maintain its operating margins. The cash had been sitting in a bank account doing nothing for three years until the share buyback. (Share prices going up is, however, not a good test of value - a company can buy back shares at a premium to book value or intrinsic value, thereby destroying value for shareholders, and yet the stock price will still, mathematically, go up. You would make money - but that doesn't mean your investment hypothesis was correct.)

The point I was making, since this is a thread about GE after all, is that I don't understand people who invest in individual companies without even studying their financial statements (at a bare minimum). Anyone who takes a cursory glance at GE's annual report will immediately be confronted with a thousand things they don't understand, because it is such a complex enterprise.

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Re: GE and the myth of "safe blue-chip stocks"

Post by whodidntante » Fri Jan 19, 2018 5:48 pm

Is this an argument in favor of small cap value? :twisted:

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Re: GE and the myth of "safe blue-chip stocks"

Post by Engineer250 » Fri Jan 19, 2018 6:32 pm

I don’t have any interest in buying individual stock. But I’d love to be the next CEO of GE trying to turn it around. Sounds like a fascinating challenge. GE board members can PM me 8-)
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Re: GE and the myth of "safe blue-chip stocks"

Post by nedsaid » Fri Jan 19, 2018 8:49 pm

Ah yes, GE never fails to disappoint. The stock fell again today.
A fool and his money are good for business.

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Re: GE and the myth of "safe blue-chip stocks"

Post by Caduceus » Fri Jan 19, 2018 9:32 pm

whodidntante wrote:
Fri Jan 19, 2018 5:48 pm
Is this an argument in favor of small cap value? :twisted:
No, it isn't. 8-) It's an argument that if folks really believed they had stock-picking skills, they wouldn't be picking things like GE, which is pored over excessively by lots of investors and finance professionals. They would be studying small-cap stocks, which is not the same thing as buying a small-cap value fund in general. They would be looking in areas where genuine opportunity might exist, and where they weren't competing with quite as many people.

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Re: GE and the myth of "safe blue-chip stocks"

Post by david1082b » Fri Jan 19, 2018 11:00 pm

Caduceus wrote:
Fri Jan 19, 2018 9:32 pm
whodidntante wrote:
Fri Jan 19, 2018 5:48 pm
Is this an argument in favor of small cap value? :twisted:
No, it isn't. 8-) It's an argument that if folks really believed they had stock-picking skills, they wouldn't be picking things like GE, which is pored over excessively by lots of investors and finance professionals. They would be studying small-cap stocks, which is not the same thing as buying a small-cap value fund in general. They would be looking in areas where genuine opportunity might exist, and where they weren't competing with quite as many people.
Lord Larry dealt with the idea that the small-cap arena provides a better avenue for stock-picking:
Turning to the small-cap asset classes, where Ranguelova, Feeney and Lu concluded that “small-cap equities remain a more fertile ground for differentiated stock picking due a number of structural inefficiencies,” the evidence tells another tale. Not only did funds from Vanguard and DFA outperform 79 percent of surviving actively managed small-cap mutual funds, but these results are even stronger than the 70 percent of actively managed large-cap funds that they outperformed.
http://mutualfunds.com/news/2016/05/19/ ... ap-market/
So you're more likely to outperform a benchmark by picking a large-cap active fund compared with a small-cap fund! Why would this be? Could it be that there are too many small stocks from which to choose, leading to worse performance on average versus benchmarks compared with large-cap stock-picking? Small-cap stocks suffer higher failure rates than large-cap ones I imagine, so picking small stocks could lead pickers to be more likely to get exposed to bad apples.

It's not possible to gauge the performance of the average retail amateur stock-picker, but I would be willing to guess that they mostly do worse than a benchmark index, especially in the small-cap arena.

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Re: GE and the myth of "safe blue-chip stocks"

Post by acanthurus » Fri Jan 19, 2018 11:38 pm

david1082b wrote:
Fri Jan 19, 2018 11:00 pm
Lord Larry dealt with the idea that the small-cap arena provides a better avenue for stock-picking:
Open ended actively managed mutual funds are a poor proxy for deep value investing since investors won't tolerate years of under performance without pulling their money out. Active management has to maintain their assets under management to make money off management fees, and doing what Caduceus is talking about is a great way to get fired as a fund manager in your second year. The opportunities he's talking about also go away as soon as you have large amounts of capital to invest. Having a small amount of money and waiting for an investment thesis to pan out are advantages the individual investor has that the vast majority of active managers don't.

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Re: GE and the myth of "safe blue-chip stocks"

Post by TonyDAntonio » Sat Jan 20, 2018 11:19 am

Engineer250 wrote:
Fri Jan 19, 2018 6:32 pm
I don’t have any interest in buying individual stock. But I’d love to be the next CEO of GE trying to turn it around. Sounds like a fascinating challenge. GE board members can PM me 8-)
Forget the challenge. I'd like to be CEO because even if I ran it into the ground, like Imelt, I'd make millions. CEO pay is a joke played at the expense of all the workers in the company.

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Re: GE and the myth of "safe blue-chip stocks"

Post by Top99% » Sat Jan 20, 2018 5:54 pm

TonyDAntonio wrote:
Sat Jan 20, 2018 11:19 am
Engineer250 wrote:
Fri Jan 19, 2018 6:32 pm
I don’t have any interest in buying individual stock. But I’d love to be the next CEO of GE trying to turn it around. Sounds like a fascinating challenge. GE board members can PM me 8-)
Forget the challenge. I'd like to be CEO because even if I ran it into the ground, like Imelt, I'd make millions. CEO pay is a joke played at the expense of all the workers in the company.
Indeed. If the objective is to run the company into the ground I will undercut your offer and do it for only a $1m. :mrgreen:
Adapt or perish

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Re: GE and the myth of "safe blue-chip stocks"

Post by katon » Sun Jan 21, 2018 4:15 am

Boglegrappler wrote:
Mon Nov 13, 2017 10:32 am
I own some GE, and they've announced that they're going to drop the dividend in half. It's not a big deal since its a small part of my portfolio. Plus you could see that possibility coming since the market was pricing the stock so that the previous dividend was creating a high 4% ish yield.

In this interest rate environment, any stock that is yielding in that neighborhood is either in a gradually declining business environment, or the dividend payout is too high and likely to be cut, or at least not increased any time soon. The so-called "dividend growth" stocks in this rate environment are not likely to have yields above about 2.5%. It is axiomatic that the current yield number will tell you the market's forecast of the dividend growth, but novices need to remember that it is inverse. Costco (which is a bit of special case because of "special one-time" dividends) yields in the 1s on its regular quarterly. JNJ yields about 2.4%. UnitedHealth is 1.40 and ATT is above 5. So of these, the implicit growth forecast by the market is highest for Costco and United health, and lowest for ATT.

The best practice for people who don't want to index, but who want dividends is actually to avoid the highest yielding stocks. The market isn't stupid. There is a reason the stock price hasn't been bid up to "match" the dividend. Good luck. Don't chase yield.
I agree with you.
I must note and add that, for example, REITs (and not only US based REITs) , have usually high dividend yields (4-5-6%) due to their dividend policies ..they must pay almost all their earnings in dividends.

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Re: GE and the myth of "safe blue-chip stocks"

Post by katon » Sun Jan 21, 2018 4:17 am

Boglegrappler wrote:
Mon Nov 13, 2017 10:32 am
I own some GE, and they've announced that they're going to drop the dividend in half. It's not a big deal since its a small part of my portfolio. Plus you could see that possibility coming since the market was pricing the stock so that the previous dividend was creating a high 4% ish yield.

In this interest rate environment, any stock that is yielding in that neighborhood is either in a gradually declining business environment, or the dividend payout is too high and likely to be cut, or at least not increased any time soon. The so-called "dividend growth" stocks in this rate environment are not likely to have yields above about 2.5%. It is axiomatic that the current yield number will tell you the market's forecast of the dividend growth, but novices need to remember that it is inverse. Costco (which is a bit of special case because of "special one-time" dividends) yields in the 1s on its regular quarterly. JNJ yields about 2.4%. UnitedHealth is 1.40 and ATT is above 5. So of these, the implicit growth forecast by the market is highest for Costco and United health, and lowest for ATT.

The best practice for people who don't want to index, but who want dividends is actually to avoid the highest yielding stocks. The market isn't stupid. There is a reason the stock price hasn't been bid up to "match" the dividend. Good luck. Don't chase yield.
I agree with you.
I must note and add that, for example, REITs (and not only US based REITs) , have usually high dividend yields (4-5-6%) due to their dividend policies ..they must pay almost all their earnings in dividends.

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Re: GE and the myth of "safe blue-chip stocks"

Post by katon » Sun Jan 21, 2018 6:02 am

JCE66 wrote:
Tue Nov 14, 2017 8:39 am
Time for a contrarian view. Consider the quote below.
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Yesterday, my wife took a long-term shot with some play money. Not a lot, mind you, but enough (for us). The price of GE is the lowest since the depths of the financial crisis of 2009. To her, this is a golden opportunity. I had joked with my wife back in 2009 that we should take 25K out of our HELOC and buy GE (it was roughly 8 bucks/share). But she quickly dissuaded me of that with a look. You know, the look only a wife can give.

This time, it was different. My wife had some cash in her Roth, asked a few questions, and then boom - bought up GE with her cash position. She could care less about the short term, she is thinking ahead to when we have grandkids (a long way off). Her reasoning was quite simple. Here was the gist of her thinking: We are talking about GE. This company was a part of the original Dow Index. It has been around for over 150 years, and has gone through multiple financial crises, competitive threats, business climates. Yeah, it is beaten down today, but in time, it will come back. Why? Do people stop getting sick? Stop flying? Stop needing power? Ain't happening anytime soon, and maybe not ever, considering how they have adapted over the last 150+ years to these different things.

My wife is an immigrant from South America, and has a pretty simple and no-nonsense view of things. I leave it to Bogleheads to make their own choices, but thought I would post something contrarian for the group to think about, and consider.

Sometimes, a 'myth' has some truth to it.
I am also from South America, living in Israel. I have a similar view like your wife. I understand that almost all the people in this forum don't think like this.
There is a fund called ... VOYA . They hold same stocks historically. Sometimes you earned total returns including dividends that the dividends could be more than the capital gain. Check this...

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Re: GE and the myth of "safe blue-chip stocks"

Post by magneto » Sun Jan 21, 2018 10:22 am

Have noticed presently, the relatively few apparently good value positions are those with serious clouds/doubts hanging over them!
This might be telling us more about markets than companies ?
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: GE and the myth of "safe blue-chip stocks"

Post by anoop » Sun Jan 21, 2018 11:04 am

magneto wrote:
Sun Jan 21, 2018 10:22 am
Have noticed presently, the relatively few apparently good value positions are those with serious clouds/doubts hanging over them!
This might be telling us more about markets than companies ?
Those are the ones where the risks have already manifested to the downside. The others flying high also have risks. The downside risks just haven't yet manifested for them.

The valuations, even of the seemingly "good value" ones, are too high. Buffet recently made a remark to the effect that GE is still not a good enough value for him to bite.

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Re: GE and the myth of "safe blue-chip stocks"

Post by InvisibleAerobar » Sun Jan 21, 2018 2:11 pm

Poster upthread made the comments that they sell products that people buy. Could someone explains what happens when the individual divisions get spun off?

So if all the sudden that GE decides to spin off its health-care and turbine divisions, do regular share holders get a stake in the companies spun off? Do share holders get anything at all (perhaps a slightly higher dividend)?

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Re: GE and the myth of "safe blue-chip stocks"

Post by Valuethinker » Mon Jan 22, 2018 8:57 am

InvisibleAerobar wrote:
Sun Jan 21, 2018 2:11 pm
Poster upthread made the comments that they sell products that people buy. Could someone explains what happens when the individual divisions get spun off?

So if all the sudden that GE decides to spin off its health-care and turbine divisions, do regular share holders get a stake in the companies spun off? Do share holders get anything at all (perhaps a slightly higher dividend)?
It depends.

Often that is precisely what happens. Canadian Pacific for example split itself up into railroads, mining, hotels (Fairmont), shipping, oil & gas and some other assets. Realized huge shareholder value through ending the "conglomerate discount" and the perception that management was not oriented to shareholder value. (Downside is you have all these extra head office and company registration and listing costs, etc.). Working out your cost basis post this event was an absolute nightmare, I warn you (if you were a Canadian taxpayer, don't know re US rules).

So 1 GE share becomes 1 GE share (which you already held) + 1 new GE Healthcare share (as was). Depending on your tax code, this could count as a realization for capital gains tax purposes? or as a dividend? Anyways you now have stock in 2 companies.

https://en.wikipedia.org/wiki/Corporate_spin-off

Another way is to restructure as 1 new GE share plus one new GE healthcare share. I think the reason one route is chosen over another has to do with the taxes company or shareholders might pay.

Other ways:

- company in effect IPOs its own subsidiary. Sells some of its 100% holding to new investors, and looks to realize value over time. What they do with the cash from the sale then depends-- expand core business, or pay back to shareholders.

https://en.wikipedia.org/wiki/Equity_carve-out

Given their pension fund deficit, there is a good case that they should do this and put the proceeds into the pension plan. From the perspective of existing shareholders, GE has in effect paid down a debt and is thus a less risky company.

- sell a division to a private buyer, eg Private Equity. Advantage over above is they get all the cash up front, and avoid the problem of a lower price in the future

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Re: GE and the myth of "safe blue-chip stocks"

Post by Valuethinker » Mon Jan 22, 2018 8:59 am

anoop wrote:
Sun Jan 21, 2018 11:04 am
magneto wrote:
Sun Jan 21, 2018 10:22 am
Have noticed presently, the relatively few apparently good value positions are those with serious clouds/doubts hanging over them!
This might be telling us more about markets than companies ?
Those are the ones where the risks have already manifested to the downside. The others flying high also have risks. The downside risks just haven't yet manifested for them.

The valuations, even of the seemingly "good value" ones, are too high. Buffet recently made a remark to the effect that GE is still not a good enough value for him to bite.
The pension fund deficit should put him, or any other buyer, right off. And the earnings momentum is still negative (AFAIK) so there could be yet more bad news to come.

But the pension fund is a very difficult thing to cap the liability other than via a Chapter 11 process.

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Re: GE and the myth of "safe blue-chip stocks"

Post by anoop » Mon Jan 22, 2018 11:00 am

Valuethinker wrote:
Mon Jan 22, 2018 8:59 am
anoop wrote:
Sun Jan 21, 2018 11:04 am
magneto wrote:
Sun Jan 21, 2018 10:22 am
Have noticed presently, the relatively few apparently good value positions are those with serious clouds/doubts hanging over them!
This might be telling us more about markets than companies ?
Those are the ones where the risks have already manifested to the downside. The others flying high also have risks. The downside risks just haven't yet manifested for them.

The valuations, even of the seemingly "good value" ones, are too high. Buffett recently made a remark to the effect that GE is still not a good enough value for him to bite.
The pension fund deficit should put him, or any other buyer, right off. And the earnings momentum is still negative (AFAIK) so there could be yet more bad news to come.

But the pension fund is a very difficult thing to cap the liability other than via a Chapter 11 process.
Buffett did say he would buy it at the right price, so presumably he doesn't think of them as needing to go through bankruptcy.

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Re: GE and the myth of "safe blue-chip stocks"

Post by HJG0989 » Mon Jan 22, 2018 11:37 am

Your wife should look at DEC in October of 87 (black Monday). How could the second largest computer company possibly not come back. The stock price never did and it never did. I took a bath on it. GE looks even less sure of where it's going at the moment to my amateur eyes.
I was a new hire back then but many of my coworkers were long time DEC employees, it was a great company to work for so people stayed on once they were hired.

A lot of people invested via the employee stock purchase program. They were really hurt because the stock kept falling after black Monday and rounds of layoffs began a while after that. Many lost the bulk of their savings and their jobs after decades of work. Plus the housing market took a hit around corporate HQ. It was a good lesson for me.

My Father did the same thing when he worked for Dow Chemical. He was fortunate that Dow continued to do well. He passed away before the financial meltdown in 2008. Dow cut its dividend by 85% and the share price dropped to $8 per share if I remember correctly. It is now back up to $75 per share and has merged with DuPont.

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Re: GE and the myth of "safe blue-chip stocks"

Post by Valuethinker » Mon Jan 22, 2018 11:49 am

anoop wrote:
Mon Jan 22, 2018 11:00 am
Valuethinker wrote:
Mon Jan 22, 2018 8:59 am
anoop wrote:
Sun Jan 21, 2018 11:04 am
magneto wrote:
Sun Jan 21, 2018 10:22 am
Have noticed presently, the relatively few apparently good value positions are those with serious clouds/doubts hanging over them!
This might be telling us more about markets than companies ?
Those are the ones where the risks have already manifested to the downside. The others flying high also have risks. The downside risks just haven't yet manifested for them.

The valuations, even of the seemingly "good value" ones, are too high. Buffett recently made a remark to the effect that GE is still not a good enough value for him to bite.
The pension fund deficit should put him, or any other buyer, right off. And the earnings momentum is still negative (AFAIK) so there could be yet more bad news to come.

But the pension fund is a very difficult thing to cap the liability other than via a Chapter 11 process.
Buffett did say he would buy it at the right price, so presumably he doesn't think of them as needing to go through bankruptcy.
I should have been more semantically precise.

Severing pension fund liabilities is difficult. Companies like the airlines and US Steel did it through a bankruptcy process.

That does not mean I think GE will take that route. It means the future financial performance of GE is even more difficult to forecast than normal, because I don't even think the company and its actuaries know where the pension deficit will go to- -too many imponderables.

Presumably with Buffett he takes that uncertainty into account, in constructing his valuation model of GE. Gives himself a significant margin of safety.

I think that:

1. if he invests he will invest with a convertible debt or convertible preference share instrument-- consistent with his investment in other large, troubled, quoted companies

2. he won't tell us he is investing until he absolutely has to by regulatory requirements, because the share price will move up against him. Ideally, he will take a significant position either by the company issuing new equity as in 1 OR where there is a strategic stake for sale (1-10%, say) and he can get it at a discount to the market price

3. he'd probably rather buy a division from them, or back a PE-like investor (like 3G Partners, but they are a consumer products buyout firm), to do so. Say the industrials division, or healthcare, or GE Engines

What is far more likely than Buffett, I believe, is that activist funds will now acquire shares and motion for the breakup of GE, seeking the support of large institutional investors. Management is on a pretty short fuse to show they have a handle on this-- the market does not like successive waves of bad news.

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Re: GE and the myth of "safe blue-chip stocks"

Post by InvisibleAerobar » Mon Jan 22, 2018 1:11 pm

Valuethinker wrote:
Mon Jan 22, 2018 8:57 am
It depends.

Often that is precisely what happens. Canadian Pacific for example split itself up into railroads, mining, hotels (Fairmont), shipping, oil & gas and some other assets. Realized huge shareholder value through ending the "conglomerate discount" and the perception that management was not oriented to shareholder value. (Downside is you have all these extra head office and company registration and listing costs, etc.). Working out your cost basis post this event was an absolute nightmare, I warn you (if you were a Canadian taxpayer, don't know re US rules).

So 1 GE share becomes 1 GE share (which you already held) + 1 new GE Healthcare share (as was). Depending on your tax code, this could count as a realization for capital gains tax purposes? or as a dividend? Anyways you now have stock in 2 companies.

https://en.wikipedia.org/wiki/Corporate_spin-off

Another way is to restructure as 1 new GE share plus one new GE healthcare share. I think the reason one route is chosen over another has to do with the taxes company or shareholders might pay.

Other ways:

- company in effect IPOs its own subsidiary. Sells some of its 100% holding to new investors, and looks to realize value over time. What they do with the cash from the sale then depends-- expand core business, or pay back to shareholders.

https://en.wikipedia.org/wiki/Equity_carve-out

Given their pension fund deficit, there is a good case that they should do this and put the proceeds into the pension plan. From the perspective of existing shareholders, GE has in effect paid down a debt and is thus a less risky company.

- sell a division to a private buyer, eg Private Equity. Advantage over above is they get all the cash up front, and avoid the problem of a lower price in the future
Thanks for the helpful explanation

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Re: GE and the myth of "safe blue-chip stocks"

Post by Peculiar_Investor » Thu Feb 01, 2018 11:20 am

An interesting read for those following GE, How GE Went From American Icon to Astonishing Mess - Bloomberg
Bloomberg article wrote:For most of its 126-year history, GE has exemplified the fecundity and might of corporate capitalism. It manufactured consumer products and industrial machinery, powered commercial airliners and nuclear submarines, produced radar altimeters and romantic comedies. It won Nobel Prizes and helped win world wars. And it did it all lucratively, rewarding investors through recessions, technological disruption, and the late 20th century collapse of American manufacturing.

That long, proud run may have come to an end. It happened, as Ernest Hemingway wrote of going bankrupt, “gradually and then suddenly.” GE hasn’t inspired awe for some time now: The company had to be bailed out in 2008 by the federal government and Warren Buffett, and across the 16-year tenure of recently departed Chief Executive Officer Jeffrey Immelt its stock was the worst performer in the Dow Jones industrial average.

The past year, however, has seen GE enter new territory. Since Donald Trump’s election in November 2016, during a stock market boom in which the Dow is up 41 percent, GE has lost 46 percent of its value, or $120 billion.
Large conglomerates tend to be huge black boxes and I for one cannot fathom how someone can properly run and operate such a vast enterprise. The timing of GE's problems is quite interesting.
Bloomberg article wrote:What’s additionally baffling about GE’s difficulties is that there’s no surrounding global financial crisis, no chorus of sober-minded people fearing for the future of capitalism itself. Rather, the company is flailing while the world’s major economies are all robustly growing. It’s the exact sort of moment when GE’s global scale should be an advantage. “It’s like their sails are all torn when they’ve got the perfect wind,” Heymann says.
As I said, a worthwhile and interesting read.
Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams

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Re: GE and the myth of "safe blue-chip stocks"

Post by Valuethinker » Thu Feb 01, 2018 11:50 am

Peculiar_Investor wrote:
Thu Feb 01, 2018 11:20 am
An interesting read for those following GE, How GE Went From American Icon to Astonishing Mess - Bloomberg
Bloomberg article wrote:For most of its 126-year history, GE has exemplified the fecundity and might of corporate capitalism. It manufactured consumer products and industrial machinery, powered commercial airliners and nuclear submarines, produced radar altimeters and romantic comedies. It won Nobel Prizes and helped win world wars. And it did it all lucratively, rewarding investors through recessions, technological disruption, and the late 20th century collapse of American manufacturing.

That long, proud run may have come to an end. It happened, as Ernest Hemingway wrote of going bankrupt, “gradually and then suddenly.” GE hasn’t inspired awe for some time now: The company had to be bailed out in 2008 by the federal government and Warren Buffett, and across the 16-year tenure of recently departed Chief Executive Officer Jeffrey Immelt its stock was the worst performer in the Dow Jones industrial average.

The past year, however, has seen GE enter new territory. Since Donald Trump’s election in November 2016, during a stock market boom in which the Dow is up 41 percent, GE has lost 46 percent of its value, or $120 billion.
Large conglomerates tend to be huge black boxes and I for one cannot fathom how someone can properly run and operate such a vast enterprise. The timing of GE's problems is quite interesting.
Bloomberg article wrote:What’s additionally baffling about GE’s difficulties is that there’s no surrounding global financial crisis, no chorus of sober-minded people fearing for the future of capitalism itself. Rather, the company is flailing while the world’s major economies are all robustly growing. It’s the exact sort of moment when GE’s global scale should be an advantage. “It’s like their sails are all torn when they’ve got the perfect wind,” Heymann says.
As I said, a worthwhile and interesting read.
I think the rot is quite old. Jack Welch old in fact. The problems GE is facing, such as pension fund deficits, are common to all older US industrial companies (and in some other countries, to).

"Neutron Jack" with his "fire the bottom 10% on the curve" undoubtedly shook up a sleepy conglomerate (consider the fate of Westinghouse). And his mantra of "number 1, 2, 3 (in a market) or out" was undoubtedly the right way to go for such a sprawling, diversified company. Conglomerates are not all evil -- consider Berkshire Hathaway and Warren Buffett.
Under Welch, GE’s net income swelled from $1.65 billion in 1981 to $12.7 billion in 2000, even as its workforce shrank from 404,000 to 313,000. But over time, less and less of that income came from technological innovations or manufacturing prowess or even the productivity gains Welch had wrung out early in his tenure. Instead it came from GE’s financial-services arm. From its humble beginnings financing family purchases of refrigerators and dishwashers during the Great Depression, GE Capital had ballooned into a behemoth whose global stable of investments ran from insurance to aircraft leasing to mortgages, giving GE a share of the action during a period when the financial sector was the fastest-growing part of a fast-growing U.S. economy.
However there was this obsession with double digit pa EPS growth. And managers of subsidiary units would know that they would get fired if they did not make their targets.

GE became addicted to:

1. doing acquisitions, often at quite high prices, to maintain growth in sales, profits and EPS. Acquisition accounting then muddies the numbers, not only to external investors, but also it appears to senior management

2. using the financial services arm to keep earnings momentum going. I've talked to GE managers who, having left, more or less admitted that they were doing that, because the alternative for someone (sometimes in a non-financial business that uses a lot of finance) was to get punished or even fired

Immelt inherited this, and the failed merger with Honeywell (prohibited by EU competition authorities). He struggled for 16 years to refocus the business. Acquisitions were also made at what now appears to be quite high prices.

What turned out post 2006 was that the Financial Services arm was not as profitable as it had appeared, and became a major consumer of capital with new regulations. Getting out of that has been a very painful experience -- and one that keeps on giving.

Meanwhile whilst the conglomerate has been much paired down - e.g. exiting appliances and plastics- -it is still a very big business that senior management is struggling to control.

The latest hit is legacy, but it's a painful legacy, and the company does not appear to be able to bottom that liability.

Berkshire Hathaway is also quite opaque about the performance of individual businesses and has a huge insurance business with long tail liabilities. Without accusing Buffett and Munger of any malfeasance, future managers may struggle to generate the performance that B & M have.
And unlike a factory, GE Capital’s highly liquid assets could be bought or sold at the ends of quarters to ensure the smoothly rising earnings that investors loved. The term accountants use for earnings from these sorts of one-off asset sales is “low-quality,” but through the historic bull market during which Welch had the good fortune to run the company, investors tended not to get hung up on questions of quality. GE’s market capitalization grew from $14 billion in 1981 to more than $400 billion when Welch retired in 2001.

The risks became clear only under Immelt, who took over the company in the wake of the dot-com bubble and right before the attacks of Sept. 11 (a particularly acute shock to a company that did billions of dollars in business with airlines). As the years went on and GE’s stock price fell to a third of its Welch-era peak, Immelt came under pressure from Wall Street to do something. He embarked on a series of splashy acquisitions, for example paying $5.5 billion for the entertainment assets of Vivendi Universal and $9.5 billion for the British medical imaging company Amersham. There were bargains such as Enron Corp.’s wind-turbine business, picked up in a bankruptcy auction, but for the most part the deals proved more expensive and less synergistic than promised.

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