In an investor presentation, Jeffrey Immelt – the CEO of diversified conglomerate General Electric Company GE – offered a relatively bullish outlook for 2016 based on his continued efforts to streamline the operating structure of the company. At the same time, he remained quietly confident to handsomely reward shareholders with healthy dividends and share repurchases.
Despite soft macroeconomic conditions and expectations of weak global growth in 2016, General Electric aims to build upon the momentum of 2015 for a healthy rise in operating profit in the next year. The company anticipates operating earnings in 2016 to be within $1.45-$1.55 a share, with the Alstom deal contributing approximately 5 cents per share. This equates to year-over-year growth of nearly 15% (on the higher end) based on the current expectations of operating earnings of $1.35 in 2015. The Zacks Consensus Estimate for 2016 is currently pegged at $1.52 and lies comfortably within the predicted range.
Organic revenue growth in 2016 is expected to be 4%. In addition, General Electric intends to return $26 billion to the shareholders in 2016, including $8 billion in dividends and $18 billion in share repurchases. Although the tally of shareholder return is set to drop from a payout of about $32 billion this year, it is primarily attributable to the overall shrinking of the company in order to realign itself as a simpler and nimbler firm with a re-focus on core industrial operations.
Since April 2015, General Electric has embarked on massive portfolio restructuring initiatives to transform itself into a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. Consequently, it has divested most of the financial units under GE Capital. Year to date, the company has reached agreements to sell $155 billion of assets under GE Capital. The only financial operations that are retained by the company include financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units directly relate to the core industrial operations of the company and thus form an integral part of its corporate activities.
The GE Capital businesses that are retained by the company account for about $90 billion in ending net investments (ENI), which represent the total capital invested in the financial businesses. This indicates a dramatic improvement for General Electric, which has been actively reducing ENI to mitigate operating risks and shield itself from intense market volatilities that plagued the market during the 2008-09 financial crisis.
The massive restructuring efforts have cumulatively led to the positioning of the company as a ‘digital industrial’ entity. Simultaneously, General Electric has been able to repose faith among investors as share prices witnessed a dramatic improvement, rising 22.6% year to date compared to 0.7% by the benchmark S&P 500 index and remains well on track to finish the year at its highest price since 2007. The shares also scaled a new 52-week high of $31.23 on Dec 16, 2015, before closing the trading session a notch lower at $30.75, up 2.2% on the bullish outlook for 2016.
The corporate restructuring activities have also positioned General Electric to probably become the first company to drop its too-big-to-fail label. The company is also seeking to apply for de-designation as a systemically important financial institution in the first quarter. We remain impressed with the continued efforts of this Zacks Rank #3 (Hold) stock to sustain its growth momentum in the near future. Other notable companies in the industry worth mentioning include Franklin Electric Co., Inc. FELE, Federal Signal Corp. FSS and Macquarie Infrastructure Corporation MIC, each carrying a Zacks Rank #2 (Buy).
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