Company: GE
Tail wagging the dog

Seeking Alpha ... General Electric And Pandora's Box

Burgess COMMENTARY
A very thought provoking article. I am reminded of the GoGo fever of the late 1960s when conglomerates were all the rage and several major industrial companies acquired financial (insurance) companies and then consumed their cash to fund all sorts of new growth opportunities. The 'financial engineering' of the day delivered profits for a while, but eventually there was a day of reckoning and everything fell apart. There is a reason that insurance companies have a lot of cash ... from time to time they need it! GE is one of my favorite companies ... not because of its financial shenanigans, but because it is a great industrial company that makes a lot of things that are world class and very much needed in the real economy. I worry that the preoccupation that the US (and UK) have with corporate financial performance is going to result in a massive diminution of the performance of these countries simply because too much investment is going into making financial wealth and far too little into the real economy that is essential to economic efficiency. The US has one of the most inefficient economies in the world in terms of carbon emissions per capita and carbon emissions per unit of GDP. This is an existential threat for the whole world and one has to wonder where the emergency fund for this can be found when the climate change day of reckoning happens! Peter Burgess http://truevaluemetrics.org
Peter Burgess

General Electric And Pandora's Box

Summary

(1) GE's ongoing troubles remind me of the myth of Pandora's Box.

(2) The January 16 'Insurance Update' convinced me that GE is no longer a dividend growth opportunity.

(3) I closed my GE position and redeployed those funds into more shares of 3 dividend stocks in the portfolio.

That was then...

I've written 3 articles about General Electric (GE). The first was a June 2017 article which asked if GE was in a position to succeed. If I had known then what I now know, I would have said, 'Possibly, but it will be a tough hill to climb.'

My October 2017 article, 'Clarity About The GE Dividend,' was an attempt to inject some humor into a difficult topic (the 50% dividend cut), and my bottom line was the I now viewed GE as 'cash available for deployment.' Several of my friends said I should have turned it into cash then. They were right. As other opportunities arose, I asked myself, 'Would I rather spend cash to buy this stock or would I rather sell some GE to buy this stock?' I sold 20% of my GE shares in mid-November at $18.28 and used that money to add more units of Magellan Midstream Partners (MMP) at $65.00.

A November 2017 article reviewed the November 13 Investor Update. I was more critical of GE (perhaps 'sober' is a better word). The seriousness of the situation was obvious, but I like the approach new CEO John Flannery is taking. I'm positive about the new CFO, Jamie Miller.

After that article, I sold 25% of my remaining GE shares at $18.41, and used the proceeds to add more shares of National Retail Properties (NNN) at $41.80.

...This is now.

General Electric CEO John Flannery and CFO Jamie Miller again appeared before investors and analysts on January 16 for an 'Insurance Update.' Here's the first paragraph from the press release:

'BOSTON – January 16, 2018 – GE (NYSE: GE) announced today that the comprehensive review and reserve testing for GE Capital’s run-off insurance portfolio, North American Life & Health (NALH), will result in an after-tax GAAP charge of $6.2 billion for the fourth quarter of 2017, and GE Capital expects to make statutory reserve contributions of ~$15 billion over seven years. The Kansas Insurance Department, NALH’s primary regulator, approved a phased contribution of ~$3 billion in 1Q’18 and ~$2 billion annually from 2019 through 2024.'

This, in effect, acknowledges that the company's insurance operation had already lost but not yet reported $6.2 billion (to be posted in Q4 2017). And, to try to make their North American Life & Health portfolio whole, GE Capital will make contributions to NALH's reserves of $3 billion in 2018 and $12 billion more from 2019 to 2024. In total, this is a $21.2 billion hit.

As I listened to this latest bad news, it became clear to me that at least for the next seven years, GE Capital will not be able to pay a 'dividend' to the GE parent company. This had been used as a 'cash cow' to help the parent company pay its dividend. As far as GE dividends are concerned, that 'cow' has now been put out to pasture.

For me, the 'Insurance Update' was the decisive blow to my GE investment thesis. I held on last June because I genuinely respect and like John Flannery. I held on in November because I thought I could see a way forward - tough, but possible.

Things (for me) are different now. The 'Insurance Update' also brought a hint that a breakup of GE may be more likely than was earlier indicated. Flannery's comprehensive review continues, but at this point, the decision about whether, or how, to break up the company or sell some of its parts is no longer relevant for me.

Pandora's Box

Greek literature provided us with an enduring metaphor for 'unexpected trouble.' The phrase, 'a can of worms' is a similar metaphor.

One dictionary defines Pandora's Box as 'a source of many troubles: something that will lead to many problems.'

In Greek mythology, Pandora was the first female, created as a joint venture by Hephaestus and Athena - following instructions from the CEO Zeus. (I'm telling this story in investor-speak.) Pandora had been given a jar (sometimes translated a 'box'). Pottery jars, prior to Amazon (AMZN), were the way many items were delivered in antiquity.

According to the myth, Pandora opened the container, thus inadvertently releasing 'all the evils of humanity,' leaving only Hope inside the container. In short, 'all hell broke loose.'

(Photo of cover of Pandora's Box, by Lisl Weil)

Don't blame Pandora - the messenger - for opening the container. The problems were already there, Pandora simply 'uncovered' them. She may have been the first investigative reporter. Think Rebecca Smith and John Emshwiller of the Wall Street Journal, or Bethany McLean of Fortune. Enron was already an empty shell. The reporters merely 'opened the lid.'

I don't blame John Flannery for taking the lid off GE's corporate container. It was long overdue. GE's lid, by all accounts, was 'well-sealed.'

GE may be a great value at the moment. It may be a 'value trap.' It has become quite clear to me that John Flannery had no idea that the situation at GE was as bad as it is - until he 'opened the box.' Analysts, as a group, didn't know. Surely, there were people at GE Capital and at the GE parent company who knew the insurance business was woefully undercapitalized.

It's of no comfort that I'm not alone in my failure to 'turn over all the rocks.' Those of you who are tempted to say, 'I told you so,' need not remind me. My failure to perform adequate due diligence on GE is ever before me.

I haven't had many losers, particularly in this generous bull market, but I missed this one. No need to whine or grovel. Just move on. If you are a former GE shareholder who was 'burned,' I suggest you move on, too. There are many people carrying around deep animosity toward Jeff Immelt. It won't hurt him if I carry around a grudge - but it will hurt me.

I'll remind you what I say to myself often: We do the best we can with the information available.

For me, the 'lid is off' GE's dividend prospects

With the disclosure of the insurance debacle, I had enough information to take action. Sometimes I must remind myself that 'I'm a dividend investor,' and 'This is a dividend portfolio.' If I was 27 instead of 67, I might choose to own GE as a speculative investment. But, GE has become irrelevant to me because I no longer see it as a dividend growth opportunity.

Flannery and Miller did an admirable job of trying to build a wall around GE Capital, maintaining that this will not torpedo their industrial business. But, the latest piece of news from the container that John Flannery has inherited - and now opened - convinces me that GE's dividend is in dire jeopardy. If the dividend survives as is, I'm not sure even Zeus could make GE a dividend growth company. The good news in the story is that Hope is the remaining item in the container. I hope I live to see GE back on David Fish's list of Dividend Champions, Contenders or Challengers, but I'm old and I'm not going to bet on it.

So, on January 18, I closed my GE position at $17.19. I used the proceeds to add to my positions in Dominion Energy (D) at $74.61, Duke Energy (DUK) at $77.49 and Hannon Armstrong Sustainable Infrastructure (HASI) at $21.88. Since I write almost exclusively about companies in my retirement income portfolio, I expect this to be my last article about GE. I wish the best for all remaining GE shareholders.
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