Just on Thursday afternoon, General Electric Co. (NYSE: GE) was reported to be in talks to sell up to $30 billion in its real estate assets. It was the sort of news that you might not expect to happen immediately. Well, it turns out that GE has announced the exit of most GE Capital assets and a structure that will accommodate huge buybacks, higher dividends and a focus on being an industrial conglomerate.
The long and short of the matter is that GE is selling off many real estate assets, it has allocated up to $50 billion for stock buybacks and it has set its dividend path for after 2016. The asset sales were confirmed as including Blackstone Group L.P. (NYSE: BX) and Wells Fargo & Co. (NYSE: WFC).
GE has been in a multiyear effort to become more of an industrial conglomerate. The reason is that the financial markets value industrial companies more than they do financial companies. GE has now gone as far to say that high-value industrials will make up more than 90% of GE’s earnings by 2018. The separation of Synchrony Financial (NYSE: SYF) is targeted by the end of 2015.
GE has also issued earnings guidance for 2015 as $1.10 to $1.20 per share, as its industrial businesses were said to still be on track. That may sound like it is under the $1.72 per share expected by analysts, but that again pertains to the core. The investment community has responded positively so far.
On the asset sales, the company also announced the sale of GE Capital Real Estate assets for approximately $26.5 billion. GE has even said that it will work with regulators to terminate GE Capital’s systemically important financial institution (SIFI) designation. GE said:
GE announced today an agreement to sell the bulk of the assets of GE Capital Real Estate to funds managed by Blackstone. Wells Fargo will acquire a portion of the performing loans at closing. The Company also has letters of intent with other buyers for an additional $4 billion of commercial real estate assets. In total, these transactions are valued at approximately $26.5 billion.
While GE has said that it is exiting most of GE Capital, the company will retain its financing vertical operations that relate to GE’s industrial businesses. In short, this still allows customers to finance through them. GE said:
Under the plan, the GE Capital businesses that will remain with GE will account for about $90 billion in ending net investments (ENI) excluding liquidity — about $40 billion in the U.S. — with expected returns in excess of their cost of capital.
GE expects to get approximately $35 billion in dividends from GE Capital from this plan. The company also will allocate much more for stock buybacks and dividend hikes after 2016. GE said:
There is potential to return more than $90 billion to investors in dividends, buyback and the Synchrony exchange through 2018. The exits of the targeted GE Capital businesses should release approximately $35 billion in dividends to GE (subject to regulatory approval), which, under GE’s base plan, are expected to be allocated to buyback; this is in addition to the impact of the Synchrony exchange and ongoing dividends. The GE Board has authorized a new repurchase program of up to $50 billion in common stock, excluding the Synchrony exchange. GE expects to reduce its share count to 8-8.5 billion by 2018. These actions would still allow room for opportunistic “bolt on” acquisitions in GE’s core markets. GE also said it plans to maintain its dividend at the current level in 2016 and grow it thereafter.
As with many major efforts and changes, there will be a cost to GE here. The company has projected that it will take approximately $16 billion in after-tax charges in the first quarter of 2015, of which $12 billion is signaled to be non-cash.
GE shares rose almost 3% to $25.73 on Thursday, and the initial early bird trading indications for Friday show GE shares indicated up over 5% at $27.20. GE’s 52-week range is $23.41 to $27.53, and the consensus analyst price target is $28.43. The conglomerate’s market cap was $259 billion as of Thursday’s close, but a 5% gain would imply a market cap of just over $270 billion.
For whatever this is worth, Moody’s downgraded GE’s senior unsecured debt rating to A1 from Aa3. Standard & Poor’s has affirmed GE’s AA+ rating with a Stable outlook.