In October of 2017 our Financial Advisor took a gamble with our hard-earned dough and increased our stake in GE (NYSE: GE). For those of you who are unfamiliar with GE, they are a Fortune 500 conglomerate founded in 1892 whose products include (but are not limited to) aircraft engines, electric motors, health care, software, wind turbines, and finance.
I’ve put some research into GE (since I now have skin in their game) and here’s the rundown:
GE’s prior CEO, Jack Welch, ran the company from 1981 until his retirement in 2001. He remains one of the US’s most revered CEOs, who launched his own MBA program and wrote a best-selling book about leadership. (No, I’ve not read it.) Other organizations have adopted his management style, dubbed “The Welch Way,” in which leaders focus on establishing trust with transparency and candor, setting examples, and ensuring a shared vision. (Interestingly, I can identify this management style at the organization where I currently work.)
Welch’s reign was marked by aggressive growth and mergers / acquisitions. Yet despite Jack Welch’s enormous success growing GE’s market value by 4,000% during his tenure, there is ever increasing controversy over whether or not this success was due to Welch’s genius or the bull market of the 80’s. (Note GE’s revenue only grew by 385%. Perhaps the 4000% market value increase was really due to the public’s enamored view of such a strong and charismatic leader…)
Before Welch handed the reins to his successor, Jeffrey Immelt, he claimed, “My success will be determined by how well my successor grows it in the next 20 years.”
Immelt’s subsequent run wasn’t so stellar. He had the bad luck of taking over GE four days before the World Trade Center and Pentagon attacks, hanging on through the 2009 financial crisis (which crippled GE’s finance arm, GE Capital.) In 2015, Immelt began a restructuring plan which culminated in the sale of a large number of GE Capital’s finance, real-estate, lending and insurance segments.
In the end, Immelt attempted to transform GE from a mega-conglomerate into one which focused on it’s core industrial businesses. Despite Immelt’s efforts, GE’s stock market value fell by about half during his tenure, in June 2017 he was replaced by John Flannery.
According to Flannery: “We need to make some major changes with urgency and a depth of purpose. Everything is on the table. . . Things will not stay the same at GE.” Armed with a mandate to cut $2 billion in expenses by the end of 2018, lift profits (easy, right?) and increase dividends, Flannery set off. News articles printed stories about GE’s new CEO and new downsizing direction.
Around this time (Oct 2017) is where where [RS] and I entered the picture by purchasing GE stock, directed by our financial adviser, who claimed that GE was “currently out of favor.” [RS] and I deliberated before buying, and I did some minor research (this blog is supposed to be the motivation for doing more in-depth research prior to making these sorts of decisions moving forward.)
After we purchased GE, the market (and ourselves) were met with a few surprises, and you can see the results of that represented by the downward trend in the above chart.
The first big surprise came when GE announced troubles with it’s Long Term Care (LTC) insurance. Long Story Short: They underestimated the cost of servicing these LTC policies and the population isn’t getting any younger. GE stopped taking on new LTC customers, but it won’t be enough to stop the bleeding. Which leads to . . .
An SEC Investigation. Yeah, that’s right. In January 2018 GE announced they were under investigation by the SEC for a $6.2 billion dollar insurance loss (a loss that GE only publicly revealed a week prior.)
An aging population and soaring healthcare costs have caused a visible trend in the insurance industry where insurance companies have either publicly booked losses, increased their cash reserves (or both). Except for GE management, it seems, who either just weren’t paying attention to that $6.2 billion, or, well . . . We’ll let the SEC have their say.
Last but not least, GE cut their dividend in half, the 2nd cut since the Great Depression.
In the end I’m not upset at any of this. It’s been a learning experience (probably no more expensive than college tuition . . . *snark). I agree with Immelt’s and Flannery’s move to shed GE’s conglomerate bloat. It is generally difficult for conglomerates to maintain a number of varied capabilities without slipping behind more focused competitors. And without a financial arm absorbing inefficiencies or losses, the waste becomes even more apparent.
GE’s been around for 125 years. Other companies like Toyota and Nintendo have completely reinvented themselves. Maybe it’s time for GE to do the same. Either way, I think I’ll be around for the ride.