Dear Mr. Berko: I bought 250 shares of General Electric at $27 over four years ago, and I’m tired of owning it. Please tell me what’s wrong. Its performance has been so disappointing that I could cry. — HS, Joliet, Ill.
Dear HS: General Electric’s major problem is that during evolution, the ancestors of 11 of its board members were in the control group and the ancestors of the other seven board members sneaked into the gene pool when the lifeguard wasn’t on duty. GE’s board is emblematic of why the boards of most public companies are frauds.
Over 70 percent of General Electric’s (GE-$18) revenues and 85 percent of its earnings derive from divisions that dominate their markets — namely, aviation (that’s GE’s crown jewel), power and health care. GE is the market leader in each of those divisions, enjoys long-term, strong relationships with its customers and has massive and indelible footprints. And an attractive percentage of GE’s revenues come from the profitable aftermarket services demanded by those divisions. Please keep that in mind.
Don’t dump GE. It’s still a blue chip company. It has a bellyache, but with the right medicine, most bellyaches can be cured. I have no feel for the new CEO, John Flannery, but I suspect he recognizes the harsh realities he must face to shape a necessary multiyear turnaround. This is a new challenge. GE must change its strategy from aggressive growth to constructive mitigation. It will be noisy and contentious. Time-endeared and costly shibboleths must be shattered. I don’t know whether Flannery has the grit to eliminate GE’s egregious cost excesses and change the way GE manages its working capital. If Flannery has the courage to do the right stuff, we may learn that Jack Welch was a clown and his successes were market-driven rather than management-driven. Then we may lean that Jeff Immelt was Welch’s brainless sycophant and that his inauspicious tenure allowed GE to slowly implode.
As I alluded to previously, worst of all are GE’s 18 dysfunctional, inutile directors, walking pustules who still think the world is flat and believe that Tinkertoy is a high-tech company. A board of directors is supposed to represent and protect the shareholders. But the GE 18 have sat on their buttered bums, sampled gourmet meals, sipped Chateau Margaux and collectively toasted their hundreds of similarly lucrative board memberships. GE’s feckless toadies get an average of $350,000 a year plus expenses and $30,000 worth of free GE products. Several board members, including former Sen. Sam Nunn (it certainly pays to be a politician), receive over $1 million for contributing their business acumen. Frankly, if these 18 stupids acted in the best interest of the shareholders, GE would be $60 a share today rather than $18. What good is a board of directors if it’s not actively protecting shareholders? I’d seriously consider suing each GE board member for dereliction of duty and malfeasance.
GE is still a massively profitable company, though it’s not so profitable as it should be. My guess is that GE’s 2017 revenues (including the purchase of Baker Hughes) will come in at $127.5 billion, a few billion dollars higher than last year’s revenues. However, GE’s 2017 earnings will probably come in at $1.05 a share, and that’s a lot lower than last year’s $1.55. GE’s revenues for 2018 may come in between $128 billion and $135 billion, and share earnings could be between $1.04 and $1.15. And I guestimate that GE’s operating margins and net profit margins will suffer in the next two to three years. Flannery believes that there could be $3 billion in cost savings; however, others think the amount could be closer to $8 billion. Flannery will be selling assets that are not key to GE’s major businesses and eliminating the numerous personal fiefdoms that resisted change. He hopes to generate over $7 billion in new cash flow and reduce long-term debt by 20 percent. And GE’s 301,000 employees may decline to 268,000.
The dividend has been cut by 50 percent, enabling GE to increase its cash balance by $4 billion. Buy another 250 shares, and hold your nose for a couple of years.
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