General Electric (GE 0.85%) had been having a good month before CEO Jeff Immelt scared investors by raising the specter of 0% growth in 2013. Last week, the company announced that it would be increasing its dividend payment by 12%, for a projected yield of about 3.6% on today's shares, marking the fifth dividend increase and the third consecutive annual increase since the recession. GE also committed an additional $10 billion to its share repurchase program. This good news was overshadowed on Monday, when the company issued a downbeat outlook for the fourth quarter and for 2013.
In GE's Annual Outlook investor presentation, Immelt tempered year-end expectations for 2012 due to a rough fourth quarter, walking back a September estimate of 10% growth in the industrials segment to only 8%. He also projected weak revenue growth in 2013, ranging from 0% to 5%, blaming continuing hardship in the global economy. This wasn't all that surprising, as other industrial bellwethers like Caterpillar (CAT 1.11%) had made similar projections as far back as October, but the prospect of no growth in 2013 has put some downward pressure on GE stock.
Before reacting to the attention-grabbing "0%" figure, it's important to remember that General Electric is the world's largest multi-industry conglomerate, with a broad portfolio of businesses that are all performing differently, sometimes with different goals. Let's break out the outlook for some key business areas to see why GE investors don't need to panic.
GE Capital gets leaner and meaner
The conglomerate's financial arm is the most important business unit to break out. Before the recession, GE Capital had grown so large that General Electric was basically a bank with an industrial side business, contributing over half of revenue and an even greater proportion of profit. When that unit blew up and nearly took GE with it, management made the laudable decision to back to the company's roots in energy infrastructure. They shed non-core assets like NBCUniversal and set out to shrink the bank.
From over 50% of revenue in 2007, GE Capital has been cut down to 45%, and management plans to take this ratio down to 35% 2015, with an eventual goal of only 30%. GE Capital has worked to exit mortgages, real estate, commercial paper, and other business lines unconnected to the unit's core strength of mid-market and specialty financing. As it sells off assets, GE has been plowing the capital into its industrial businesses.
Even though the new GE Capital has actually become more profitable due to its lending discipline, this slimming down will entail some loss of revenue, at least in the short term. For shareholders who invest in GE because of its industry leadership in energy and transportation technology and infrastructure, this is all to the good. For shareholders who preferred the old GE Capital, I would point out that if you'd like to invest in a bank, there are plenty of banks to buy.
Backing out the effects of right-sizing GE Capital, 2013's 0%-5% revenue growth projection actually looks like 2%-6% growth. While still not stellar, Immelt also projected that efficiency initiatives, aimed at cutting 70 basis of cost out of the business, would help to drive double-digit earnings growth in the industrials business in 2013.
Tilting at windmills
Besides GE Capital, the biggest problem in GE's portfolio is its wind turbine business. As the domestic leader in wind turbine production, the company is being hurt by the coming expiration on Dec. 31 of an American federal tax credit for wind energy, known as the PTC or production tax credit. The credit has been intermittently offered for 20 years, and has been enough to foster the development of the wind industry, but looks now unlikely to be renewed in the turmoil of fiscal cliff negotiations.
In the face of uncertainty over the PTC, major wind energy producers like NextEra Energy (NEE +0.26%) have cut back on turbine purchases. While industry insiders like NextEra CEO Lew Hay claim to support a gradual phase-out of the credit, the abrupt end of the policy has caused severe disruption in every company related to wind energy.
However, even this grim development offers some potential catalysts for General Electric. For one, since the company's projections assume the elimination of the PTC, if the credit were actually extended as part of the fiscal cliff negotiation, 2013 could look very rosy indeed for GE. Further, even if the credit expires on Dec. 31, that doesn't spell the end of the wind energy business. The credit has expired three times since its inception, and each time was later renewed. In 2004, the expiration of the credit caused new wind power to drop 77%. Yet, after the credit's subsequent renewal, wind power made its largest advance ever, multiplying ninefold between 2006 and 2012.
Even if wind energy doesn't make a return, the culprit is less likely to be a tax credit and more likely to be cheap, abundant and domestic natural gas made accessible through slickwater hydrofracturing. And that development, far from being a threat to General Electric, is actually a testament to the company's broad portfolio of energy infrastructure. General Electric is a world leader in the design and manufacture of turbines that generate electricity from natural gas. It expects massive profits as utilities seek to replace dirty and inefficient coal-fired plants with natural gas plants.
