All good things must come to an end, and in the case of American multinational conglomerate General Electric (NYSE: GE), its time is now. Founded in 1892, the bastion of American innovation will soon split into three separate public companies in an attempt to simplify its business model and reinvigorate growth.
The three businesses will center around healthcare, aviation, and energy respectively. The healthcare company is expected to be separated out in early 2023, while the energy spin-off will occur in early 2024. Following this, the remaining General Electric entity will become an aviation company.
Why does this matter to investors?
General Electric is one of the most storied companies to have ever hit the market. It was once the largest company in the world by market value — as recently as the year 2005. The Financial Crisis took its toll on the business, however, with the stock even being dropped from the Dow Jones Industrial Average in 2018, despite being one of the original members of the index when it was founded in 1896.
The stock has massively underperformed the market over the past 20 years, losing around 2% every year since 2009 against an average 9% annual return from the S&P 500. The company has tried its best under CEO Lawrence Culp to drastically simplify the structure of the business in an attempt to bring about profitability. “We’ve made a lot of progress, not only with the balance sheet but improving our core operations, over the last several years,” said Culp in a call this week.
Culp also affirmed that “with the progress on the deleveraging, the progress with our operational transformation, the pandemic lifting … there’s no reason to wait a day” when speaking about the company splitting into three. The move has been widely welcomed by Wall Street analysts who see this as a needed step and an encouraging sign. Investors will be hoping that this move will catapult the company, or should I say companies, back to a semblance of its former glory. The split will undoubtedly allow for greater focus and a more nuanced strategy, but only time will tell if it’s the right decision.
Existing investors are probably wondering what exactly will happen to their current holdings. The details have yet to be fully confirmed, but it’s anticipated that shareholders will receive dividends of newly issued shares in both the healthcare and energy spinoffs, while maintaining their existing shares in General Electric as it takes shape as an aviation company. All three firms are then expected to trade independently as publicly-listed, investment-grade companies.
So is General Electric a good investment?
General Electric offers quite a unique offering to investors right now. A drop in price of over 50% throughout the past five years is typically cause for concern, and still certainly is, but it places the company at a point where its “deconglomeration” could yield enormous growth. This radical shift definitely seems necessary and could be just the thing to allow the company to recapture some of its former heights.
Investors should exercise caution though, as any value to be gained is unlikely to be realized until at least 2024 when the split has taken place fully. The split could also throw up its own issues, particularly regarding regulation and labor. We’ll certainly be keeping our eye on the company over the next few years, and would encourage you to do the same, but we’ll be doing so from a distance.
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Financial Writer at MyWallSt
Pádraig’s favorite stock is Nike. Growing up as a sports fanatic, seeing Nike collaborate with athletes like Jordan, Lebron, and Ronaldo inspired him and cemented the brand in his mind. Now, despite having failed miserably in his attempts to earn a fabled Nike sponsorship, he still believes in the innovation and creativity behind Nike and is convinced they will only grow stronger as the world's leading sports brand.