GE is one of the largest manufacturer companies in the world and it started with a light bulb. Every business is often faced with opportunities that it may or may not want to do. The company starts it hopefully makes a profit and one of the supplier chains has an issue and management believe we want to control more of of our destiny – it buys a stake in the supplier. If things go well, maybe that stake goes higher and the company owns it. During an economic cycle downturn, the company says it should diversify its revenue streams during the next expansion. The company finds something with similar management focus and hopefully profits are steady. All companies do the exercise and sometimes they have to sell assets or break apart the company because the business model no longer fits.
In an article by Michelle Chapman of the Associated Press, GE is an example of the above. During the 1980’s the Chairman was Jack Welch and he was all over the news because his results of his work at GE were outstanding. Through the 1990’s the stock returned 1,120.6% of investments. The company grew 5 fold and the company value increased 30 fold. At the time all companies look at what GE was doing including 6 sigma.
Then the financial crisis happened and GE Capital which was raking in the profits, suffered huge losses tied to the mortgage backed securities crash. Shares fell 80% in 2008 and only now have GE recovered.
GE is a conglomerate and the Board has decided at this time the business model of a conglomerate does not work – the synergies and diversification is not a plus and a decision to split the company into 3 has been reached. The company will split into aviation (its most profitable unit), health care and energy. The aviation unit will keep the GE name and the others will have new names in 2023 and 2024.
Linking to dividend paying companies, although everyone loves to own a company growing at 1,000% over a decade, the reality is at some point that growth will be slower. Ideally, the desire is to own a company that is doing well on a consistent manageable basis, for you as an investor to be able to look at some easily to see metrics to determine if you want to continue to hold the shares. Often times people hold shares because they lost money and are waiting, ideally you want to hold shares in profitable companies which pay a dividend which over the long term increases your size of your portfolio.
There are more questions than answers, till the next time – to raising questions.