Capital Overview General Electric Company (GE), incorporated in 1892, is a diversified technology and financial services company. The products and services of the company vary from power generation, aircraft engines, water processing, business and consumer financing and industrial products that serves customers in more than 100 countries. It is the sixth largest company in the world based on revenues. GE Capital is the financial services division of GE and works as a bank/lender but claim that they are “not just bankers, they’re builders”.
This extension of GE funds many businesses and gives expertise in building and growing those businesses. There are 5 branches of GE Capital.  Commercial lending and leasing provides business financing to purchase, lease and distribute equipment and provides business capital for corporate acquisitions, refinancing and restructuring as well as services to manage large fleets of cars and other equipment. Consumer financing is offered through their Retail Consumer Finance (RCF) division.
They offer credit card, installment lending, and financial services for consumers through dealers, retailers, associations, contractors, manufacturers, healthcare practices and service providers (in nearly 20 industries). They also offer credit services directly to the consumer through a large product menu, including private label credit cards, flex loans, all-tender loyalty, and gift cards. GE Energy Financial Services helps its customers and GE grow through new investments, strong partnerships and optimization of its $21 billion in assets. 1 “GE Capital: Our Businesses” http://www.
gecapital. com/en/our-company/our-businesses. html (Sept 29, 2012) GE Energy Financial Services is based in Stamford, Connecticut. GE Capital Aviation Services (GECAS) is a leading global provider of commercial aircraft leasing and financing. They service over 75 countries by offering products including leases and secured loans on commercial passenger aircraft, freighters and regional jets; engine leasing and financing services; aircraft parts solutions; and airport investments. GE Capital Real Estate is a leading global commercial real estate investment company.
This division’s assets currently are approximately $73 billion and they offer direct property acquisition, joint venture partnerships and debt financing serving global markets. As a whole, more than 70% of GE Capital’s loans are under $100 million. They focus primarily on loans and leases that they underwrite to hold on their own balance sheet rather than on generating fees by originating loans and leases, then selling them to third parties. General Electric has a long history of dividends that have consistently increased annually.
Before 2008, GE Capital contributed almost half of total revenues for the GE conglomerate. The financial crisis at that time, greatly affected GE Capital and the company decided to get rid of some of its businesses and rethink its strategy. The firm had to cut its dividends in 2008 due to massive losses. 2009 showed a massive fall in revenues of $17 billion. They decided to focus on its core industrial businesses and because of that they were able to get back on track. At the end of 2011, GE generated earnings of more than $14 billion which represented a 28% increase from the previous year.
The 2011 cash flows statement shows a decrease in GE Capital receivables and cash inflows which show how well the company has implemented its strategy and shed GE Capital losses from a financial crash. Most of GE’s long term debt originates from the GE Capital services. At the end of 2011, total long term borrowings were $243 billion which was down from $293 billion in 2010. The firm has faced some troubled economic times but turned it around and has increased dividends for the past two years. Currently, GE pays an annual dividend of $. 68 and a dividend yield of 3. 02%, quarterly dividends have increased to $.
17 due to recovering business. The industrial arms of GE Capital “remain sensitive to the economic cycle and may experience small bumps along the way. ” 2 The numbers do not justify how well the company has been doing through this economic downturn. “Morningstar analyst Daniel Holland states, “GE knows the energy and manufacturing businesses, and that is where it should remain”. 3 GE Capital plans to divide the energy sector into three smaller divisions: GE Power and Water in Schenectady, NY, GE Oil and Gas in Florence, Italy, and GE Energy Management in Atlanta, GA. They expect this move to save each division $200-300 million per year.
All three divisions will report directly to the CEO, Jeffrey Robert “Jeff” Immelt. GE Capital is also set to purchase MetLife’s retail bank deposit business. MetLife is selling its business to remove itself from FDIC scrutiny and regulation. The company thrives because they modify and strategize as necessary with their changing business and the fickle current economy. 2 Efsinvestment “General Electric: Strong Dividends Set to Continue” http://seekingalpha. com/article/885331. html (Sept 26, 2012) 3 John Mylant, “General Electric is Doing Better Than its Numbers Show” August 13, 2012 http://seekingalpha.
com/article/804191. html (Sept 26, 2012) Another area where the strength of the company is sometimes overlooked is the aviation business. GE has sixty percent of the global aircraft engine market and is expected to maintain that for the next five years despite the intense competition from Pratt & Whittney, which holds thirty percent of the market. Over $17 billion worth of orders were booked with GE Capital at the 2012 Farnborough Air Show. 4 This air show is a seven-day international trade fair for the aerospace industry which is held in even-numbered years in mid-July at Farnborough Airport in Hampshire, England.
Warren Buffett maintains control of over 7 million shares of General Electric. When he bought this stock in 2008, he received preferred stock with a 10% annual dividend and is guaranteed for five-years to buy GE common stock at $22. 25/share. With that CEO Immelt received $3 billion to raise cash after financial struggles which he used to turn things around at GE Capital and now there has been a rebound in investor confidence. Most stock traders do not have the kind of cash flow that Buffet has and could not have sustained the hit he received from this stock in 2009.
Five months after his purchase, the stock traded as low as 5. 73 but Buffet was not worried. Buffet’s investment was made one week after Goldman Sachs Group Inc. purchased $5 billion of preferred shares and warrants. Buffet said “They’re (GE) going to be around five or ten or one hundred years from now and if you buy at the right time, you’ll probably make some money. And he did just that, GE paid $3. 3 billion to Buffet in October of 2011 to redeem his Berkshire Hathaway Inc. preferred stock. 4 Chris Frangold, “GE: Don’t Underestimate This Blue-Chip” August 31, 2012 http://seekingalpha.
com/article/841041. html (Sept 26, 2012) “Zahid Siddique, a portfolio manager at Rye, New York-based Gabelli & Co, who manages $1. 4 billion including GE shares said, “It was very critical at that point for GE to attract someone like Warren Buffet. It showed confidence in the companies as well as in the broader U. S economy. They’ve done okay in the time that’s passed. ”5 GE’s current cash balance has jumped from $51 billion in 2007 to a recent $122 billion. Though its dividend has fallen from $1. 28 in 2008 to a current $0. 68, dividend increases are expected in the near future.
The conglomerate is generating healthy amounts of profits and cash flows again and GE Capital is responsible for more than half of that success. Their investment in energy and aviation has proven to be profitable and their commercial and consumer lending has been modified and is now under control and lucrative once again. GE has returned to its blue-chip status after some uncertain times. Many investors believe the stock is a safe buy and Chris Frangold who has no positions in any GE stock and no plan to initiate any positions “believes every retiree should own GE stock.
”4 He goes on to say that “there is significant upside potential to this stock because of its strategy and the quality of the management team, and I have no hesitation in recommending it to investors. ” 4 Chris Frangold, “GE: Don’t Underestimate This Blue-Chip” August 31, 2012 http://seekingalpha. com/article/841041. html (Sept 26, 2012) 5 Tim Catts, “Buffet GE Bet Pays Off Topping Crisis Warrant Strike Price” Sept 16, 2012 http://www. sfgate. com/bloomberg/article/Buffet-GE-Bet-Pays-Off/ ENDNOTES 1 “GE Capital: Our Businesses” http://www. gecapital. com/en/our-company/our-businesses.
html (Sept 29, 2012) 2 Efsinvestment “General Electric: Strong Dividends Set to Continue” http://seekingalpha. com/article/885331. html (Sept 26, 2012) 3 John Mylant, “General Electric is Doing Better Than its Numbers Show” August 13, 2012 http://seekingalpha. com/article/804191. html (Sept 26, 2012) 4 Chris Frangold, “GE: Don’t Underestimate This Blue-Chip” August 31, 2012 http://seekingalpha. com/article/841041. html (Sept 26, 2012) 5 Tim Catts, “Buffet GE Bet Pays Off Topping Crisis Warrant Strike Price” Sept 16, 2012 http://www. sfgate. com/bloomberg/article/Buffet-GE-Bet-Pays-Off/