General Electric (NYSE: GE) will enjoy 10%-15% growth for its infrastructure businesses in emerging markets over the next five to 10 years, according to comments delivered Sunday at the Asia-Pacific Economic Cooperation conference by GE vice chairman John Rice. While this figure would mean a slowdown from 15%-20% growth in recent years, it remains an optimistic outlook on the global economy given slower growth projections in China and potentially damaging political turmoil in the US. Rice's comments come ahead of the company's third-quarter earnings next week and are in line with the General Electric's long-term plan to slim down its bloated financial business and return to its roots as an energy infrastructure leader.
GE has been investing heavily in its various infrastructure businesses over the past five years, and according to Rice a key contributor to that 10%-15% growth figure will be one of the company's youngest divisions, GE Oil & Gas. Oil and gas was one of General Electric's strategic priorities as it emerged from the recession determined to return focus to energy infrastructure.
Before the recession, GE Capital Corporation had grown to contribute 55% of revenue, making GE look more like a big bank with an industrial business on the side, rather than the reverse. The company's exposure to the financial industry left GE vulnerable in the recession, and in the aftermath of the lending meltdown GE took drastic measures to stay afloat: It cut its dividend, lost its AAA credit rating, accepted loan guarantees from the federal government, and issued new stock at highly favorable terms to a group of investors including Berkshire Hathaway's Warren Buffett. Having undergone so much trauma at the hands of the capital unit, CEO Jeffrey Immelt determined to shrink the unit, using the sale of assets to beef up GE's tried-and-true energy infrastructure business.
Accordingly, GE invested heavily in energy, including spending $14 billion building up its oil and gas segment. That investment is paying off, as the segment has more than tripled in size to a $15 billion a year business. As industrial businesses have grown at the expense of the financial business, the size of GE Capital has steadily shrunk from 55% of revenue to just 30% in the second quarter of 2013.
Rice's comments show that the company is committed to the strategy, seeing strong growth in its core industrial businesses that can sustain investor returns without resorting to the financial business risks that brought General Electric to its knees in the recession. As the world's population expands and the burgeoning global middle class can afford higher standards of living, General Electric's critical energy infrastructure will be in worldwide. The long-term trend of a larger, richer population will reward GE's renewed focus on its core industrial competencies. GE investors can be confident that the company will perform well with a global economic recovery, and the company will pay a hefty and growing dividend north of 3% while investors wait.
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