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GE Cashes In on Plastic

I want to say one word to you. Just one word. Are you listening?


Sorry, couldn't help myself. News broke today that General Electric (NYSE: GE  ) has sold its underperforming plastics division to Saudi Basic Industries, the largest public company in the Middle East. Much like that random family friend in the classic film The Graduate, Saudi Arabia appears to see a bright future in plastics. After all, Saudi Basic paid $11.6 billion, more than the $8 billion to $10 billion that analysts forecast when news broke in January that GE had hired Goldman Sachs (NYSE: GS  ) to auction the unit.

Like Dustin Hoffman's character in the same film, GE wants its future to be ... different. It doesn't want to be involved in a commoditized business, as the plastics biz has become over the decades. GE is getting out of these low-growth sectors, putting more priority on areas such as infrastructure, health care, and finance. I think the infrastructure play is the one to watch going forward. In delivering clean water and reliable energy supplies to countries beginning to experience industrial revolutions on a massive scale, GE will have a very full order book.

So what will GE do with the $9 billion it's netting post-tax? Jump on the buyback bandwagon, of course. Businesses are in a tight spot these days -- global assets aren't cheap, so acquisitions are a dicey prospect. At the same time, it's also hard to justify sitting on a large cash pile, and that's why companies as varied as American Eagle Outfitters (NYSE: AEO  ) , Yum! Brands (NYSE: YUM  ) , and Wells Fargo (NYSE: WFC  ) are all buying back their own shares.

Buybacks keep the market happy, but they may not be the wisest use of capital today, given that we arguably hit peak earnings back in the fourth quarter. While the specific companies I've mentioned are of high quality, I'm not terribly optimistic about how this buyback game will play out.

In short, I have mixed feelings about the news today. I'm happy with GE's decision to sell, and with the price it got on the deal, but I'm not convinced that the market is mispricing the company to such a degree that a share buyback is justified.

Related Foolishness:

From the Middle East to Latin America to Southeast Asia, the Motley Fool Global Gains team is keeping an eye on dramatic economic growth overseas. To see what stocks have been recommended, try the service with an all-access pass free for 30 days.

American Eagle is a Motley Fool Stock Advisor pick.

Fool contributor Toby Shute's wonderful grandmother is a former GE lunch lady. He doesn't have a direct beneficial interest in the shares she earned as an employee. American Eagle is a Stock Advisor selection. The Motley Fool has a disclosure policy.

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