We should have known something big was coming when General Electric (GE - Free Report) slashed its dividend in half last November, and now, it looks like the industrial and infrastructure giant is mulling a restructuring move that would break up the company.
The speculation began when GE announced that it will be taking an after-tax GAAP charge of $6.2 billion to its fourth quarter earnings—at the new 21% tax rate, the charge will be $7.5 billion—a significant hit that is linked to weakness in the company’s North American Life & Health insurance portfolio.
This is a shining example of the difficulties GE and other long-term care insurers and re-insurers have faced over the years. Because of the rise in healthcare costs, and the simple fact that people are living longer, many insurers are struggling to “make good on policies dating back to the 1990s,” notes Reuters.
GE also said that over the next seven years, it’s financing segment GE Capital would make $15 billion statutory reserve payment contributions to the long-term care insurance assets. But in order to fund this, the company will be suspending GE Capital’s dividend for the “foreseeable future.”
In a conference call with analysts, CEO John Flannery said that “We are looking aggressively at the best structure or structures for our portfolio to maximize the potential of our businesses,” and a review “could result in many, many different permutations, including separately traded assets really in any one of our units, if that’s what made sense.”
“Needless to say, at a time when we are moving forward as a company, I am deeply disappointed at the magnitude of the charge,” Flannery said on the call. “It’s especially frustrating to have this type of development when we’ve been making progress on many of our key objectives.”
Not only is Flannery seemingly implying that a breakup for GE is on the horizon, but sources told CNBC’s David Faber that a split is “likely,” and could come as soon as this spring.
Shares of GE closed the day down almost 3% to $18.21 per share.
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When Flannery took over from previous CEO Jeffrey Immelt last August, he had big plans for GE. He made a promise to consider all options for the company, and emphasized a business strategy that would concentrate on jet engines, health-care machines, and power-generation equipment.
Fast forward to November, and you could see those plans beginning to come into focus, though some cost cutting and other major business decisions had to happen first. Besides its dividend cut, GE is planning over $2 billion in cuts this year, along with $20 billion in divestments over the next year or two.
This could include the potential sale of oil and gas company Baker Hughes (BHGE - Free Report) ; GE just bought a majority stake in BHGE last year, and the consolidation of each respective company’s oil and gas businesses is going smoothly. GE previously sold its real estate portfolio, its water business, its unit that makes electrical equipment for utilities, its dishwasher and appliance business, and sold its media properties NBC and Universal Studios to Comcast (CMCSA - Free Report) .
Additionally, the company said that there will be “ongoing actions” to shrink GE Capital’s business over the next two years, continuing a plan set in motion back in 2015 to sell the majority of its finance division’s operations.
Too Little Too Late?
While its insurance arm has certainly been struggling, it’s just another problem in a long list of problems for GE.
The company was the worst performer on the Dow in 2017, with shares losing almost 40% in value. Margins have been on the decline since 2014, and the company’s free cash flow has grown less and less consistent, especially after it decided to sell its very lucrative lending business.
Chart via: Zacks
Since its founding in 1892, GE grew into a business icon, creating a portfolio along the way that spanned everything from energy and infrastructure to finance and media. The company was once looked to as a reliable symbol of American success, and during the ‘80s and ‘90s, its management practices gained a huge following under then-CEO Jack Welch.
Under Jeffrey Immelt, GE began to shrink, with a goal of focusing on businesses it could win in and getting rid of the ones that were distractions. But compared to other multinational rivals like Honeywell (HON - Free Report) and United Technologies (UTX - Free Report) , GE’s continued underperformance became even more glaring.
What’s next for the company? If a breakup is on the docket, GE and its management must make sure that each of its core businesses are performing at the levels where they need to be, and that may be a tough thing to accomplish.
But even if GE decides to split up, what’s the guarantee that the move will help the company bounce back? Flannery’s narrowed vision certainly has potential, and a fresh leader at the head of the table is never a bad thing for an older institution like GE. However, with a weakening brand name and strong growth competitors, a breakup may not be the easiest fix for GE after all.
GE reports its fourth-quarter earnings on January 24.
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