What The Hell Is Wrong With General Electric Now?

In this post, I’m going to spend some time highlighting some of the findings that stuck out at me when I looked at General Electric’s (GE) 10k from 12/31/08. I’m also going to discuss the outrageous compensation packages that were paid out last year along with some of my thoughts on why asset managers should be held accountable. I’m always interested in your comments or thoughts.

That question might be one that long-term investors are asking after GE decided to cut its dividend. It’s the first time that they’ve cut their dividend since 1938. Let this be a signal. This is not your father’s recession. This is a monster recession. When all is said and done, this “Financial Crisis” will make the great depression look like a day at the ballgame. I decided to take a closer look at GE’s balance sheet and income statement in the 10k, posted on the SEC’s website.

Here’s what hit me in the face when I looked under the hood:

1. GE was paying 1.24 out of 1.72 earned in 2008 for dividends - too much. It was a good move to cut the dividend. If the economy continues to get worse, they’d begin to eat into their cash stash. Not a good thing in a recession.
2. GE has 323,000 employees around the world - 1/2 in US and 1/2 outside US. This is a huge number of employees. I’d hate to have to meet this payroll every week.
3. Company has about $48billion in cash at 12/31/08 - sounds like a lot, but when you think about the size of their payroll and the debt they’ve got to service - it’s not a huge cushion.
4. GE is assuming that their pension plan assets will grow at around 8.5% per year. Thesese assumptions are overly optimistic. Failure to achieve these returns will result in a hit to earnings to fund the difference between actual and projected returns. Eventually GE will run out of cash if the markets don’t perform better than they have been. “Considering the current and expected asset allocations, as well as historical and expected returns on various categories of assets in which our plans are invested, we have assumed that long-term returns on our principal pension plan assets will be 8.5% for cost recognition in 2009, the same level as we assumed in 2008, 2007 and 2006. GAAP provides recognition of differences between assumed and actual returns over a period no longer than the average future service of employees.” - GE, 10K, 12/31/08.
5. GE then goes on to explain the “underfunding” in more detail. I’d start to become more concerned if I were a GE retiree or employee. We’re in the calm before the storm.
   “Our principal pension plans were underfunded by $4.4 billion at the end of 2008 as compared to overfunded by $16.8 billion at December 31, 2007. At December 31, 2008, the GE Pension Plan was underfunded by $0.9 billion and the GE Supplementary Pension Plan, which is an unfunded plan, had a projected benefit obligation of $3.5 billion. The reduction in surplus from year-end 2007 was primarily attributable to asset investment performance resulting from the deteriorating market conditions and economic environment in 2008. Our principal pension plans’ assets decreased from $59.7 billion at the end of 2007 to $40.7 billion at December 31, 2008, a 28.2% decline in investment values during the year. Assets of the GE Pension Plan are held in trust, solely for the benefit of Plan participants, and are not available for general Company operations. Although the reduction in pension plan assets in 2008 will impact future pension plan costs, the Company’s requirement to make future cash contributions to the Trust will depend on future market and economic conditions” - GE 10k 12/31/08.
6. GE Capital has a huge portfolio consisting of RE, Commercial Loans and Aircraft Leases (see below). Given the state of the economy, this portfolio has got to be bleeding big time. The portfolio is not just in the US, but all around the world. If the US is the economic driver for the world, then expect NON-US to perform worse.



7. The biggest asset on GE’s balance sheet is the “Financing” receivables. Over $365 billion in financing receivables. The majority of the receivables are in the area of equipment leasing to the commerical and industrial side. The second largest area is mortgages, credit cards and car loans. GE is really just a big bank.
   



8. GE basically borrowed this money in the capital markets and then re-loaned it out and was making money on the spread. Now that businesses and individuals are struggling, GE may have a hard time collecting from businesses and individuals. What this means is that their ability to repay debt is being impacted. This is not good. It’s terrible for GE shareholders, that are below the bond holders in the capital structure. It’s bad for preferred holders. Bond holders will be the last to be impacted.
9. Bloomberg: Moody’s said yesterday it will keep GE on review for a possible debt downgrade from Aaa, as it calls the highest level. Standard & Poor’s also kept GE’s top-notch AAA and “negative” outlook unchanged and said “it would be difficult” for GE to achieve its $5 billion profit forecast for the finance unit in 2009 as conditions worsen.
10. GE has a lot of work to do to improve their situation. GE is no different that other banks in the USA. They should be under the same salary caps / constraints that other financial institutions are under. I think that the Government should also be stress testing their portfolio and limiting executive compensation as well (see graphic below). Senior execs seem to be “pigs at the trough” at the expense of bondholders and common stockholders. I attached a link to the proxy filed at the SEC. It’s really pathetic.
    
    





11. Here’s the listing of the largest institutional holders of GE. I challenge these firms to be leaders. Where’s the leadership? How can these firms permit the executives of GE to get away with the type of theft from shareholders and bondholders that is taking place? In my opinion, it is these firms that need to be held to blame. Nobody has pointed a finger at this industry. I will right now.
    

    Here’ why I think that they (asset managers) need to accept part of the blame for the ridiculous compensation packages - not only for GE but also for other banks and institutions. When mutual funds and ETFs came to being, it changed the dynamic of how companies are controlled. Shareholders used to have to vote proxy statements and approve compensation for management. The shareholders were individuals. John Shareholder used to go to the annual meeting and stare down the CEO when he was trying to vote himself a $14mm annual pay package. It often didn’t pass. Today, individuals that fail to vote proxy statements, give the fund company the right to vote their proxy. Fund companies often go along with management. Fund companies don’t want to be a thorn in the side of management, otherwise they won’t get information at the quarterly conference calls. They become disliked by management. Today the dynamics are different from what they used to be. This means that fund companies are to blame for a lot of the problems with compensation. They continue to collect their asset based management fees month after month and don’t really care. Vanguard has preached for such a long time that their fees are so low and their costs are so low. I would suggest that their costs, in retrospect to society, have really been very large. By enticing individuals to dump their money blindly into funds and turning over the reins to fund companies, individuals have separated themselves from one of the important functions of shareholders. Fund companies have failed to hold firms accountable. It’s one of the failures of the fund industry, which in my opinion, gets very little press or thought.

Conclusion:

1. GE is hurting and things will get worse. Sell the stock now.
2. GE is just a big bank, not an industrial firm.
3. Management is nothing but pigs at the trough and need to be held accountable.
4. Asset managers are to blame for the ridiculous pay packages. They should show leadership.
5. After dividend cuts, employee layoffs will be next.
6. GE, GM (GM), Ford (F) - huge conglomerates have just become big banks.
7. We’re a society of debtors without means to service it.
8. The international holdings of GE will suffer more than domestic holdings.

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