In the past, I have been critical of the effectiveness of the stock buyback programs at mega-cap firms like General Electric (GE) and Bank of America (BAC). Even though I have considered both stocks to be intelligent investments these past few years, I recognized that earnings growth and P/E expansion would be the drivers of total returns, but the share repurchases couldn’t be relied upon to build wealth in the face of garish stock options to the executives of the firms.
Since General Electric sold off nearly $30 billion in GE Capital to purchasers that include Wells Fargo and The Blackstone Group, it has been engaging in a stock buyback program so enormous that it dwarfs the stock-based compensation paid to General Electric’s management.
Specifically, General Electric trailed only Apple in largest amount of dollars spent repurchasing stock during the last quarter. They repurchased $7.6 billion of their own stock last quarter, compared to only $150 during the same time in 2015. It has used up $17 billion worth of its $50 billion stock buyback commitment through 2019. GE’s earnings per share have increased by 5.6% per year since 2014 due to the buybacks.
At the time that General Electric started repurchasing the stock, it was valued at $24 per share. The company only had to pay 16x earnings to retire its stock. Now, the stock is at $32 per share for a valuation of 21x earnings.
It is still early, but I am continue to favor the conclusion that the sale of the financial assets at GE Capital was not in the best interests of shareholders. The financial assets have grown profits at 9% annually since 2012, and the assets that GE sold have increased in market value by almost 40% in less than a year since GE sold them. Meanwhile, the funds from the sale are now being used to repurchase stock in the 21x earnings neighborhood which makes it difficult for the diminishing share count to offset the net income lost by GE Capital’s retail and commercial portfolios.
The industrial assets remain quite strong, and are so enduring that GE shareholders can suffer a lot of abuse and still eke out fine investment results. But it will be in spite of, not because of, GE’s asset reshuffling.
The correct solution would have been for GE management to provide Gibraltar-like capitalization for GE Capital, and refuse to loosen the liquidity standards and budge below that in an effort to goose profits. Instead, it continues to be the case that the engineers and salesmen at the industrial units create the extraordinary value that ought to power double-digit wealth creation while the shareholders see their returns take modest haircuts from the latest bit of alchemy divined by the management team in Fairfield.