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GE Reduces Pension Liabilities by 8%, Yet Faces Huge Burden

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General Electric Company (GE - Free Report) lowered its pension deficit by $2.4 billion in 2017 compared to the previous year owing to solid performance, employer contributions and changes in mortality and salary assumptions. The move marks 8% decrease in its existing $28.7 billion pension deficit. The company is going through tough times tackling the worst shortfall in corporate America.

Pension Woes

GE’s pension plans cover about 6,18,000 current and former employees. The pension was well funded for many years but the deficit grew over the past decade because of low interest rates and volatile financial markets. The pension trust of the company holds more than 30 million GE shares that declined more than 50% in the previous year. As of now, GE's pension remains the most underfunded on the S&P 500.

GE reported $100.3 billion pension plan obligations and $71.6 billion liability in assets for 2017. Pension costs have therefore turned out to be a bottleneck for GE’s earnings growth. With poor performance, stakeholders are concerned as to how the company will generate sources to meet liabilities. Following a management overhaul in mid-2017, GE took steps to shore up the pension fund, including a move announced in November to borrow $6 billion to pre-fund the plan through 2020. Also, the company intends to focus on three core segments — power, aviation and healthcare equipment, which require advanced hi-tech products with a high degree of reliability. These products often generate higher margins and are likely to contribute to higher long-term growth. GE will also benefit from rising interest rates. Every quarter-point increase cuts $2.4 billion from the amount the company will owe its pension plan participants. 

Light at the End of the Tunnel?

General Electric expects a gradual improvement in earnings with structural changes, simplification and cost-cutting initiatives. The company currently anticipates operating earnings in 2018 to be within $1.00-$1.07, with growth momentum in Aviation and Healthcare and continued challenges in the Power segment.

Share Price Movement

However, GE shares have fallen 17% this year, being the worst in the Dow Jones Industrial Average. The stock has underperformed the industry in the last three months, with an average loss of 20.1% compared with a decline of 2% for the latter. It remains to be seen if GE at all can benefit in the future from its reduced pension liabilities.


 

Zacks Rank and Key Picks

General Electric carries a Zacks Rank #5 (Strong Sell). A few better-ranked stocks in the industry are Federal Signal Corporation (FSS - Free Report) , Raven Industries, Inc. and 3M Company (MMM - Free Report) . While Federal Signal and Raven Industries sport a Zacks Rank #1 (Strong Buy), 3M has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Federal Signal exceeded estimates in the trailing four quarters with an average of 11.5%.

Raven Industries has an expected long-term earnings growth rate of 10%. It surpassed estimates in the trailing four quarters with an average beat of 25.8%. 

3M has an expected long-term earnings growth rate of 10.2%. It trumped estimates in three of the trailing four quarters, the average being 3.2%.

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