General Electric Co. (NYSE: GE) keeps moving closer and closer to being an industrial conglomerate rather than a conglomerate that is part industrial and part bank. While the company has been rapidly selling off financial assets of GE Capital, GE has now finally been notified by the U.S. Financial Stability Oversight Council that GE was voted to remove GE Capital’s label as a “systemically important financial institution.” This also means that GE’s financial operations are no longer in the “too big to fail” category.
Having the “SIFI” designation removed effectively means that General Electric’s financial operations are no longer in the “too big to fail” category. It was the endless financial exposure that GE had ahead of and during the recession which made GE’s stock price fare much worse than peers like 3M, Honeywell and United Tech.
It was back in April 2015 when GE’s Jeff Immelt and Keith Sherin announced that GE would seek to have that SIFI status removed. By selling off so much of the financial services operations and by selling off most of GE Capital, GE can now be evaluated like an industrial conglomerate.
At that time, GE’s lending business was one of the nation’s largest banking businesses with assets of close to $500 billion. This move will also lower capital reserves and regulatory costs for GE and GE Capital. Synchrony Financial (NYSE: SYF) has now been spun out of GE and all share exchanges have been formalized and done for quite some time. The recent weakness in Synchrony has not even had any real spillover impact on GE. That should be further representation that GE is moving up and on in its quest to be an industrial focused company.
GE CEO Jeff Immelt has said that the new market conditions and a higher regulation climate put GE Capital’s necessary returns under its goals for staying in the business. GE Capital’s Keith Sherin also identified that GE would be able to save hundreds of millions in operating costs due to lower capital reserve requirements and regulatory costs.
Another milestone here for the nation’s largest conglomerate is that this was the first SIFI removal with the oversight committee’s backing. GE Capital will also send an $18 billion dividend up to the parent company. That capital is being used for multiple purposes of course, but GE’s massive stock buyback is being targeted at this time to eventually get closer to 8 billion shares outstanding from the 10 billion prior amount. GE’s buyback efforts have taken its outstanding share count down to about 9.2 billion common shares.
GE Capital has now signed sales agreements for roughly $180 billion worth of businesses and assets. It has also closed on more than $15 billion of those announced sales, and it has simultaneously derisked its business since the recession.
Roughly half of GE’s profits were tied to financial lending and financial services at the peak before the recession. Moving forward, that number is shrinking rapidly and may ultimately be under 10% of GE’s future profits.
When so much of GE’s profits came from financial operations, that eventually ended up dragging GE into the danger zone going into the recession. To prove that point, GE’s common stock quarterly dividend of $0.23 per share has been in place since the end of 2014 — but that is still far shy of the $0.31 quarterly payout that was being paid in 2008 and into 2009.