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General Electric Company (GE): A Slowly Shrinking Finance Arm

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General Electric CompanyGeneral Electric Company (NYSE:GE) is slowly making good on its promise to shrink its finance arm, while at the same time returning value to shareholders. That’s a good sign, but it needs to keep going.

The Trouble with Money

General Electric Company (NYSE:GE) is a giant conglomerate that has refocused on its industrial businesses. The decision to get back to basics was pretty much forced on the company by the deep 2007-2009 recession. The company’s finance group had been growing steadily more important over the years, but nearly crumbled when the financial markets dried up. As a result GE was forced to take a government bailout and cut its dividend.

Getting Healthy

In 2009, the finance arm essentially stopped contributing to General Electric Company (NYSE:GE)’s bottom line as it worked to right itself. Payments resumed last year and are scheduled to be around $6.5 billion this year. Clearly, the finance arm has a lot to offer if it is managed properly.

In fact, GE needs to have a finance arm to help customers buy its large and expensive products. So, the division should never go away. That said, it operated, and still operates, in some areas that aren’t core to GE’s industrial focus.

Using the Cash

The money from GE’s finance division is likely to help fund its share buybacks and shareholder dividends. However, General Electric Company (NYSE:GE) is usually on the hunt for acquisitions, so these payments can also be used to bolster the industrial business’ growth. That will help to reduce the importance of the finance arm over time.

Lufkin Industries, Inc. (NASDAQ:LUFK) is the most recent “big” purchase. The bolt on acquisition will cost around $3 billion. Although the sale of NBC helped fund this deal, it is representative of the changes taking place at GE.

Lufkin Industries, Inc. (NASDAQ:LUFK) operates in the Oilfield and Power Transmission areas, both of which tie into GE’s Oil & Gas group. That GE unit grew earnings 16% in 2012, making it the top performer across the company’s industrial divisions last year. The Lufkin deal should help keep that growth going.

Lufkin Industries, Inc. (NASDAQ:LUFK) is an all-cash deal, so clearly the company is putting its cash to work. That said, Lufkin investors should lock in their gains—just in case the acquisition falls apart. Although Lufkin continues to perform well as a stand alone entity, it is highly unlikely that there will be much upside beyond the current price levels.

The Risk

General Electric Company (NYSE:GE)’s first quarter results, however, show a big risk to the company’s renewed industrial focus. Revenues and profits in the industrial business were down 6% and 11%, respectively. The finance arm saw revenues advance 2% and profits jump by 9%. That type of leverage is a hard drug off of which to wean oneself.

Investors have to keep a keen eye on the finance arm, lest management allows it to grow disproportionately large again. On that front, Bloomberg recently wrote about GE considering a spin off of parts of its finance arm. That would likely be a good move for shareholders, but at this point is little more than conjecture.

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