GE announced that it will be dismantling GE Capital, its financial business, so that the company can become something more transparent. Not only that, but there are disadvantages that come with GE Capital. Because of the financial business, GE has managed to become more profitable. However, the extra profits come with more risk, which makes it harder for investors to take a chance on GE stock.
Over the next two years, GE will be exiting its lending business. It will be selling off 26.5 billion dollars worth of office buildings and commercial real estate debt, most of which will be bought by Wells Fargo (WFC) and Blackstone Group (BX).
By 2018, GE expects industrial operations to account for over 90% of earnings, 32% more than industrials accounted for just last year. Obviously, GE does rely on its financial component for a significant amount of its earnings. However, the volatility associated with that component weighs down GE stock value, regardless of how profitable it is.
The positive sentiment was observed in trading today, as GE stock surged over 8% today. As a result of the announcement to shrink its finance arm, GE has seen praise by analysts across the board today.
One of the positive moves GE announced today is its plan to buy back $50 billion in stock. Through this, GE expects to reduce the amount of shares outstanding by about 20%. This move was done in order to offset the negative impact to earnings as a result of shrinking GE Capital.
A problem with having $500 billion in assets in GE Capital is the amount of importance that the component bears on the overall banking landscape of the country. GE was hit harder than many companies during the financial crisis of '08. A lot of this is because of GE Capital. As a result, investors have been pessimistic about GE stock in general, since the company is likely to take another big hit if another financial crisis occurs.
GE is labeled as a "systematically important financial institution". It is likely that it can escape this negative label by shrinking GE Capital. You see, a company with that label is constrained by the Fed, so liquidity and leverage requirements set these institutions back by lowering the amount of flexibility they have, thus limiting their profit potential.
Bottom Line: GE is making major headway in changing the landscape of its company. By divesting and diminishing its financial arm, GE Capital, the company can have a clearer identity. GE's plan of going back to its industrial roots gives investors more confidence since they won't have to deal with the risk that its finance business is exposed to. Although the business is profitable, the risk associated with it didn't give investors a true sense of consistency and stability for the long run.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report GENL ELECTRIC (GE): Free Stock Analysis Report WELLS FARGO-NEW (WFC): Free Stock Analysis Report BLACKSTONE GRP (BX): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research
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