Since its founding nearly 120 years ago, General Electric Co. (GE) has presented itself as the essential growth company, whose main product was “progress” as it brings “good things to life.”
Now elephant-hunting activist investor Nelson Peltz is suggesting, gently but firmly, that GE come to terms with its maturity and behave a bit more like an entrenched cash cow.
This was not Peltz’s explicit message in spending $2.5 billion for about a 1% stake in GE in what might be called a “friendly activist” approach. In a “white paper” laying out recommendations for the company and detailing its investment thesis, Peltz’s Trian Fund Management calls GE a “defensive growth” company. Trian also classifies the company's long-term organic growth prospects in its industrial and healthcare franchises as “strong.”
But in pressing GE CEO Jeff Immelt to further cut costs, discard the remnants of its finance division, add debt to buy back even more stock and follow strict rules in pursuing new acquisitions, Peltz is effectively implying that GE nurture its core businesses while vastly shrinking its market footprint with aggressive buybacks and stepped-up dividends.
In many respects, such a reassessment by Immelt would merely be an acknowledgement of the way Wall Street has already defined GE in the last decade or so.
The stock, famously, has dramatically underperformed the market over two market cycles, and remains at only two-thirds its price of September 2007, right before the financial crisis vaporized the value of nonbank financial firms such as GE Capital.
Before Peltz’s stake became public this morning, GE shares had a dividend yield of 3.6%, a 1.5 percentage-point premium to the 10-year Treasury yield and a level typically associated with mature, slow-growth companies.
GE has responded to the Peltz investment with cautiously welcoming words, while pointing out (correctly) that his recommendations line up rather closely with the tack GE has already been pursing.
Under Immelt, GE has indeed become more focused, exiting the television industry, selling off its appliance business and shedding its insurance, lending and credit card units, while reinforcing its industrial franchises through infrastructure, aerospace and healthcare acquisitions.
As the Wall Street Journal notes, Immelt likes to point out that he has parted with some 65% of the GE that he inherited in 2001 from his predecessor Jack Welch.
Yet, still, GE sees itself as a fast-paced, innovation-propelled go-getter of a company rather than an entrenched defender of wide-moat business-to-business manufacturing and services businesses.
Its current boilerplate company description hints at GE’s strained effort to insist it’s hustling to define the next big thing: “GE is the world’s Digital Industrial Company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive.”
Immelt’s main misstep was not at all within his control. He was handed the CEO job at a time when GE shares were grossly overvalued, after two decades of earnings management and valuation expansion under the Welch personality cult. And finance was far too large a contributor to GE’s results.
Even as Immelt streamlined, of course, he has arguably paid too much to participate in growth industries such as healthcare imaging. And he pushed into oil-and-gas equipment in a forceful way in recent years, just in time to catch a share of the rapid slowdown after the oil-price crash.
The fact that Peltz’s approach is so cordial is itself evidence that GE is not a broken or mismanaged company. He engages his targeted companies with varying degrees of aggression and scorn. He fought and failed to get board seats at DuPont Co. (DD) this year. He publicly urged Pepsico (PEP) to split in two and merge its snacks business with Mondelez International (MDLZ). Pepsico has resisted and a truce was reached involving board representation for Peltz.
With GE, Peltz is effectively just spotlighting what he views as an undervalued, neglected blue-chip stock that he figures can increase in value by some 50% to 70% without radical measures.
It’s certainly true that GE has lost the attention of professional investors. Six of the top 10 mutual fund holders of GE are index funds, which must own it, suggesting that few active stock pickers are bothering with the name.
GE has long been a mainstay of retail-investor portfolios, and the company wisely caters to this group with impressive communication efforts and a focus on the dividend payout.
Peltz’s involvement could draw other institutional investors in, if there’s a perception that Immelt will be pushed to quicken the pace of shareholder-friendly action.
The investment also might speak to the general dearth of big, ripe targets for activists. Once safe mega-cap companies from Coca-Cola Co. (KO) to Microsoft Corp. (MSFT) to Apple Inc. (AAPL) have become activist bait. These companies are too large for any one fund to muscle around easily.
But when well-known activists “get long and get loud” toward a household-name company, it often turns into a contest of rhetoric and reputations, with both sides trying to prove it has the better formula for enriching shareholders. It doesn’t always work out well for investors.
But with GE stock acting as dead money with a bond-like yield, the downside would appear pretty limited even if the upside fails to follow Peltz’s confident prediction.