GENERAL ELECTRIC (1999)
General Electric (GE) is one of the world’s largest industrial firms with annual sales of
over $100 billion. Its products include major appliances, jet engines, electrical power
generation, distribution, and control equipment, lighting products, plastics, and medical
diagnostic equipment. The company also owns NBC, which offers network television
services, operates television stations, and provides cable programming and distribution
services. Through General Electric Capital Services, Inc., the company has become a financial service powerhouse whose services include leasing, real estate financing, and
consumer insurance products.
On December 17, 1999, GE announced that its board of directors had just approved a 3for-1 stock split. In addition, the company raised its quarterly dividend payment from 35
cents a share to 41 cents a share on pre-split shares, and expanded its share repurchase
program by $5 billion. Stock price reaction to the announcement was immediate and
dramatic. GE’s stock opened for trading on the New York Stock Exchange at $147.75 a
share. The announcement was made at 10:00A.M.; within an hour, the stock rose to
$154.75 before closing at $152 a share.1
GE’s Historical Distribution Policy
GE had a long history of stock splits, dividend increases, and share repurchases. Since
1980, the company had initiated four 2-for-1 stock splits. The last of these splits was announced in December 1996 when GE’s stock was trading between $90 and $95 a share;
the split became effective in May 1997 when shareholders approved increasing the number of authorized shares. By May 1997, the stock price had risen to $108 a share or $54
on a post-split basis. The new 3-for-1 split, if effective immediately, would have resulted
in a $50-51 share price on a post-split basis. Speculation about the stock split had driven
up the price of GE stock for more than a week prior to the announcement (see Exhibit 1).
The company had raised dividends every year for the past 24 years. The announced 41cent quarterly dividend represented a 17 percent increase over the rate paid in 1999. This
dividend increase was also higher than the dividend growth rate of 15 percent over the
last 5 years. While earnings had grown by an average of the 13 percent over the last 5
years, analysts currently expected GE’s earnings to grow by 14.1 percent a year over the
next 5 years.2
1
2
Source: Yahoo Finance; Historical Quotes.
Source: Zacks Investment Research: December 1999.
The company’s stock buyback program was put in place in 1994. Since that time, GE had
repurchased more than 300 million shares – adjusted for stock splits – at a cost of $15
billion. The board’s action increased the repurchase authorization from $17 billion to $22
billion.
Reaction of the Financial Analysts
In making the announcement, GE Chairman and CEO Jack Welch said “Today’s actions
by the board of directors reflect GE’s financial strength and the outlook for our diverse
array of global leadership businesses.”3 Welch went on to say, “These moves should
make our shares more attractive to a broader array of investors.4
The reaction of many financial analysts was less restrained. Bill Fiala, analyst at Edwards
Jones said, “If this were an earnings announcement, they would have beat expectations.
The fact that it was such an aggressive move on their part – doing the 3-for-1 instead of
the 2-for-1 stock split – increasing the dividend growth faster than earnings growth, and
the huge increase in their share repurchase really reinforces how optimistic GE is about
their earnings.”5
Nick Heymann with Prudential Securities saw the board’s actions as a watershed for the
company. According to Heymann, GE was the first “traditional” manufacturing firm to
make the transition to an “e-commerce” business model. Heymann went on to say “From
now on, GE should be viewed as one of the leading candidates to create value as any equity in the marketplace for shareholders and the best and most consistent one to
outperform the market.”6
GE’s valuation seemed to support Heymann’s contention. As Exhibit 2 indicates, GE’s
price-earnings (P/E) multiple is considerably higher than any diversified manufacturing
or financial services firm with similar growth expectations. Could this high P/E mean that
GE was overvalued? Or could it mean that the analysts’ earnings growth estimates still
did not reflect the accelerated revenue and profit potential inherent in GE’s adoption of
an e-commerce business model?
3
4
5
6
Source: Reuters News Release; Friday, December 17, 1999.
Source: Associated Press News Release; Friday, December 17, 1999.
Source: Reuters News Release; Friday, December 17, 1999.
Op.cit
EXHIBIT 1
SELECTED DAILY STOCK PRICES
December 1 – December 17, 1999
Date
December 1
December 2
December 3
December 6
December 7
December 8
December 9
December 10
December 13
December 14
December 15
December 16
December 17
Source: Yahoo Finance
General Electric
Closing Price
S&P 500
Closing Level
134.50
134.68
136.25
137.25
140.00
141.25
143.56
147.44
148.82
149.88
144.32
147.62
152.00
1397.72
1409.04
1433.30
1423.33
1409.17
1403.88
1408.11
1417.04
1415.22
1403.17
1413.33
1418.78
1421.03
EXHIBIT 2
EARNINGS MULTIPLES AND EARNINGS GROWTH RATE
SELECT DIVERSIFIED MANUFACTURING AND FINANCIAL FIRMS
DECEMBER 1999
Price-Earnings
Multiple
Expected Earnings
Growth (%)
GENERAL ELECTRIC
48.1
14.1
Diversified Manufacturing
Honeywell International
United Technology
Tenneco
Textron
FMC Corporation
21.5
21.8
6.7
19.0
9.8
15.2
15.2
14.3
14.8
10.0
Diversified Financial Services
Citigroup
American Express
ING Group
Manulife Financial
19.9
30.8
17.7
11.1
14.1
13.5
15.0
12.9
Source: Zacks Investment Services