Why Divesting From Financial Services Is A Good Move By GE
Craig Adeyanju | Apr 13, 2015 08:24AM ET
As last week was going to an end, General Electric Company (NYSE:GE) emergency loans solutions an appreciable growth potential.
In the announcement, GE said:
“GE Capital has been an important part of the history of GE. However, the business model for large, wholesale-funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward.”
To put it bluntly, GE is trying to say that the since the financial crisis, the economy and its growth has been weak. Combine this with the stricter financial regulations that followed the financial crisis, it is no longer easy to use financial business as leverage for its operations.
Note that GE entered into the financial sector at a time that featured the rise of Wall Street firms and a withering the manufacturing sector. Therefore, the initial entry into the financial space was a move to stay relevant. However, with the party in the financial sector over, it only makes sense for the company to divest itself from the sector and focus on its core business.
Data gotten from GE’s annual reports
As the chart shows, the impact of GE Capital on GE’s total segment profit has been on the decline. And it signals that it is becoming increasingly difficult to be profitable in the financial sector, especially when rendering financial services isn’t the core of the business. You will understand better when you think about the fact that interest rates in the US are at historic low levels. And with such a degrading financial space, and weak economic growth, the value of the financial arm of GE may keep declining. So I see this move as one in which the company is trying to squeeze value off its financial businesses before things get worse.
If there were any untold part to the story, it would be that GE has plans to enter into another sector where the party is just starting. I say this because it is unlikely that GE’s exit from financial services is instigated by a surge in the manufacturing economy. Perhaps GE is planning to grow into a manufacturing plus services company. This way, it would tap into the growth of the services economy in the US. We would have to wait to see what the company will do.
Final word
However, for now, investors, especially those with an eye for long-term income, might want to focus on the income potential that lies ahead with GE. The company said, “There is potential to return more than $90 billion to investors in dividends, buyback and the Synchrony exchange through 2018.”
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There are two opportunities here. The first is the opportunity for dividend growth. This is a welcome prospect for investors who have seen dividends from the company cut down in the recent past.
Second, the buyback program will go some way to improve the value of the company, which should help push up its stock price. This will also go some way to push up dividends yield. Therefore, investors should see this as a positive move rather than a panic move.
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