What Will General Electric Company (GE) Do With Its Pile of Cash?

Page 1 of 2

General Electric Company (GE)General Electric Company (NYSE:GE) and Comcast Corporation (NASDAQ:CMCSA) announced Tuesday that Comcast will complete the purchase of former GE subsidiary NBCUniversal by the end of the first quarter in 2013, several years earlier than anticipated. Comcast purchased a 51% stake back in 2011 and will be snapping up the remaining 49%, as well as related properties like the iconic 30 Rockefeller office space, for a total price tag of about $18 billion. Added to the $77 billion in cash by the end of 2012, the industrial giant will have a $95 billion pile of money to deploy. What will it do with it?

Healing scars?
Part of it will be promptly returned to shareholders. On a call discussing the sale Wednesday morning, General Electric CEO Jeffrey Immelt announced that dividends will continue to grow in line with earnings, a policy the company has pursued since being forced to cut its once-legendary dividend in 200
9 by two-thirds, as their overgrown GE Capital unit threatened to bring the blue-chip down in the financial crisis. Since then, the dividend has regained some ground but remains about one-third below pre-recession levels. General Electric would dearly like to restore the dividend in full, and they should do so.

Immelt also announced that an existing share-repurchase program would be expanded to authorize $35 billion in buybacks, with $23 billion remaining. It will accelerate the program to repurchase $10 billion in shares in 2013. I’m not convinced this is wise. Buybacks make sense when shares are selling at a discount, but General Electric just hit a new post-recession high on Wednesday. The aggressive buyback program doesn’t seem to based on management’s belief that this is the best use of capital, but instead by a desire to “make up” for the nearly 700 million shares it was forced to offer during the recession to remain solvent.

GE officials have repeatedly emphasized their goal of getting the share count back under 10 billion, but this seems to me like closing the stable door after the horse has already bolted. Shareholder equity was diluted, and the company had to offer shares at very low prices. Buying them back now after the recovery, at post-recession record high prices, means that GE has adopted the long-term strategy of selling low and buying high, a highly effective method of setting shareholder value on fire. The only good rationale for buying back shares is the belief that doing so is good allocation of capital because shares are undervalued. GE seems instead to believe in share buybacks as a sort of post-trauma therapy.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!