General Electric (NYSE: GE ) is one of the most well-known and well-recognized companies on the planet. But there's one hidden truth about its business that often goes undiscussed.
The wide range of businesses
One of the most fascinating things about General Electric is the wide range of businesses and divisions which all come together to create the company itself:
Yet with the upcoming spin-off the consumer finance unit of GE Capital -- it will IPO as Synchrony Financial later this year -- the firm expects GE Capital's earnings to dip to roughly $5 billion by 2015. It'll undoubtedly still be a large unit, but it won't be quite as massive as it has been in the past.
But taking a step backward, what does GE Capital the business mean to General Electric the company?
Since 2012, the unit has delivered a staggering $13 billion back to General Electric -- "the parent" -- and Jeff Immelt recently highlighted GE Capital is expected to return another $3 billion this year.
That money is in turn used for share buybacks or mergers and acquisitions for its massive industrial segment.
Investors should see this as a true bright spot for the General Electric as a whole.
The key to capital allocation
One of the most important factors impacting the longer term success of a company is capital allocation. This is recognizing what firms do with the money they earn. Whether it be through dividends, share buybacks, reinvestment back into the business, paying off debt, or buying new businesses, ultimately the money they're able to earn has to go somewhere.
In the case of GE Capital, it's interesting to note its key purpose is to supply the fuel for buybacks or acquisitions.
In some ways GE Capital mirrors the insurance units of Berkshire Hathaway. Like the insurance arms, GE Capital a highly profitable business that generates returns impressive returns -- it's profit margin stood at 18.7% last year -- but it doesn't require continual investment to keep its function. As a result, its profits are in turn deployed to make investments in other profitable businesses across the globe.
This should cause optimism for investors, because General Electric itself has noted the wide range of opportunity that are available to its other businesses. The $11 billion of orders from countries in Latin America and Angola is just one example of many.
It's encouraging to know General Electric has a unit that doesn't require significant investment or capital expenditures to keep it functioning, but instead generates cash that can in turn be deployed to other more profitable businesses. It'll be important to monitor how well it is doing in making acquisitions and to ensure the money is used effectively, but being able to do so is a great place to start.
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