General Electric: Divide to Conquer?

General Electric (GE) made a new 52 week low this morning at $8.43 before closing just above $9.  GE's stock has been punished for its finance arm that finances both commercial and consumer loans.  Can the company's consolidated business model that combines the industrial manufacturing, services and media businesses of General Electric Company (GE) with the financial services businesses of General Electric Capital Services (GECS) survive?

GECS' says their portfolio is to weather the credit cycle than money center banks:

Source:
GE Annual Outlook Investor Meeting
Presentation slides 12/16/08

 

Will GE's lower consumer exposure allow the company to survive?  While commercial loans have lower loss rates than consumer loans, in this recession it may be just a matter of time for commercial loan losses to catch up.  The company's lower US exposure does not equate to lower losses as the rest of the global economy declines in correlation with the US.

GE sees financing as a competitive advantage in providing financing solutions to their customers.  The US auto makers show that a business dependent on financing their customer's sale is vulnerable. 

Has GE written down their commercial loans to a realizable value given the broad based asset price declines? 

In GE bulls vs. bears, Steve Tusa from JPMorgan makes the bear case:

The biggest issue is GE Capital. GE is planning for potential losses of $5 billion in consumer loans, but this is only about 7% of total assets. There's another 93% of asset base that GE is not writing down as aggressively - for example, GE's $300 billion of commercial assets, which include real estate, aircraft financing and energy financing, among other areas.

You haven't yet seen the bankruptcy cycle in corporate America. Everything's been focused on the consumer. But GE is a bigger player in that business than they are with the U.S. consumer. That's why GE Capital's earnings base has held up so well until now. Street estimates do not reflect how bad the commercial credit cycle is going to get by the end of 2009.

Scott Davis of Morgan Stanley makes a weak bull case:

Contrary to popular belief, we think a dividend cut at GE would be well received by the market. No one's buying the stock for a 10% yield.

The stock recently rallied 15% the day a GE press release said it was going to revisit its dividend policy next quarter, which is code for, "We're going to cut the dividend."

You buy GE for growth. Retail investors have two choices: own stock that has 10% yield and never grows. Or own one that cuts it to a more realistic level and grows in the next few years.

I agree that GE should cut its dividend; a 10% yield is absurd.  See my additional thoughts on dividends in The Bank Dividend Race to $0.01.

GE needs to get rid of its legacy "assets" and further trim down the GECS financing business so they can focus on continued growth in their energy, infrastructure, technology and service businesses.