General Electric (see chart here) today announced earnings will decline (read article here). Its very large GE Capital unit, which produced 45% of last year’s corporate earnings, is seeing its unit earnings hit hard in this financial crisis. With its admission of the expected decline, many analysts are angry and say the senior leadership has no credibility (read article here). They are crying for heads to roll. So, should you sell GE stock if you own it?
First, look at the announcement. In addition to saying earnings are going to decline, the company has said it intends to diminish its financial business and grow its global industrial business. While it is cutting the dividend the financial unit pays to the parent, it is also cutting the debt in the financial unit. And, most importantly, GE is halting its stock buyback. "We have suspended the stock buyback to reduce GE Capital leverage, while still being able to pursue opportunistic acquisitions" is what Chairman Immelt said.
This is great news for investors. This management team has said it is less interested in manipulating earnings per share by buying back stock, and instead wants to make sure it has cash to make acquisitions at a time when many business values are declining. GE is preparing to keep its growth going, primarily outside financial services, by making sure it has cash and continuing its hunt for acquisitions. Meanwhile, its actions allowed the rating agencies to re-affirm GE’s triple A credit rating – making it a company able to raise debt from around the globe as this crisis continues.
This is exactly what you want to see in a Phoenix Principle company. GE is a portfolio of businesses, which it works aggressively to keep growing. Selling things that don’t grow, and buying things that do. It keeps moving people around in the company to challenge them, and thus help both employees and their units grow. It isn’t stuck in its old business, but is ready to keep moving forward. And it is planning to move forward by admitting it intends to make acquisitions if the markets remain troubled and asset values keep falling. Rather than pulling back to protect its core – especially its core financial services unit – GE leadership is taking action to move forward with less emphasis on financial services and a plan to invest in other businesses with better return potential.
If you are an employee, a vendor, a customer or an investor in GE – could you ask for more? With its eyes firmly on the future, a passion for beating competitors, a willingness to Disrupt even during turbulent markets and the willingness to continue creating and maintaining White Space GE will continue to be a long-term survivor with above average performance long term. Preparing to grow, regardless of market conditions, is part of what makes GE stand out – despite its critics.