Currently, General Electric has $685 billion in assets and $562 billion in liabilities. After a successful GE capital spin-off, the company would have $266.4 billion in assets on its balance sheet, along with $143.4 billion in liabilities. The company’s shareholder equity would stay the same at $123 billion.
What does General Electric gain from spinning off GE Capital?
The advantage to General Electric Company (NYSE:GE), the parent company, is that the $61.9 billion that was set aside as a reserve for loan losses can be re-purposed for investment activities relating to its industrial segment.
General Electric can earn a 20.22% return on invested capital from its industrial segment (based on United Technologies Corporation (NYSE:UTX)’s return on equity). If General Electric can consistently earn 20.22% from $61.9 billion, the company would earn $12.51 billion in net income per year from the freed up capital.
The freed-up capital could contribute to the company’s pre-existing net income of $13.641 billion by an additional $5 billion in net income, totaling $18.641 billion in net income. Over the course of 5-years, the successful investment of capital from the GE capital spin-off could increase the company’s projected rate of growth by an additional 7.5%. Currently analysts on a consensus basis anticipate the company to grow earnings by 11.03%. So if, we were to combine the added return from freed-up capital with General Electric’s projected rate of growth, it would equate into an 18.5% growth rate on average for the next 5-years.
United Technologies Corporation (NYSE:UTX) is an aerospace company that is similar to GE’s industrial segment, and offers investors a 2.25% dividend yield. The company is projected to grow earnings by 13.53% on average over the next 5-years while trading at a 17.6 earnings multiple.
The Boeing Company (NYSE:BA) is another aerospace name that could be a potential alternative to General Electric. The company is projected to grow earnings by 13.92% on average over the next 5-years. The company also trades at an 18.7 earnings multiple, while paying a 1.94% dividend yield to investors.
General Electric Company (NYSE:GE) if it were to successfully spin-off GE capital could beat both United Technologies and The Boeing Company (NYSE:BA) in terms of valuation, growth, and dividend yield. General Electric currently trades at a 16.4 earnings multiple, the lowest against the compared peers. General Electric also pays a 3.23% dividend, the highest amongst the compared companies. Finally, the 18.5% projected earnings growth rate would make GE’s earnings growth superior to the peer group.
I sincerely hope Jeffrey Immelt (CEO of GE) successfully completes the GE Capital spin off.
The article The Implications of Splitting Up General Electric Into Two Separate Publicly Traded Companies originally appeared on Fool.com and is written by Alexander Cho.
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