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General Electric's Mystery Metric -- and What It Reveals

By John Bromels - Apr 12, 2016 at 8:25AM

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GE has created a metric to value its GE Capital holdings called ENI. But what is ENI, anyway? And what can it tell investors about the company?

Image source: GE.

General Electric (NYSE: GE) has big plans. The company has pledged to return approximately $100 billion to investors in buybacks and dividends by 2018. That's no small potatoes.

To make that promise a reality, the company is divesting most of its GE Capital financial holdings. Some of these were spun off as Synchrony Financial (NYSE: SYF) last year. The rest are being sold piecemeal to various buyers. GE anticipates it will sell off $200 billion worth of businesses to raise $35 billion to return to shareholders.

Wait ... what?

If you're not really sure how those numbers add up, you're not alone. It all boils down to three letters: ENI.

The mystery metric
ENI is short for "Ending Net Investment." If you've never heard the term before, don't be surprised. GE invented the metric in 2008, and it's the only major corporation to use it. 

According to The Wall Street Journal, GE computes ENI in one of its lending businesses by starting with the business's assets, and subtracting liabilities that don't require interest payments (e.g., accounts payable or insurance reserves). GE claims this provides a clearer picture of its financial positions. 

What it doesn't clarify is whether GE is on track to meet its goals of returning cash to shareholders.

By any measure 
GE started its GE Capital asset sales off with a bang last April, announcing that Blackstone Group and Wells Fargo were buying $23 billion of them. Throughout 2015, a steady stream of additional transactions was announced. In September, GE Capital Chairman and CEO Keith Sherin even predicted the company would be "substantially done" with its divestitures by the end of 2016. 

But it's hard to tell if the company is still on track, because it has been measuring all its sales in ENI. And ENI doesn't seem to correlate at all to the sale prices the businesses have been fetching. The company plans to sell GE Capital businesses totaling about $200 billion (in ENI) to reach its goal of $35 billion (cash to shareholders). That would translate to about $0.175 raised toward the goal for every $1 in ENI.

But many sales have fallen short of that 17.5% threshold. The sale of GE's Mexican lending and leasing business, for example, will contribute only about 9% of ENI. The sale of the UK home lending portfolio, just 6.9%. The sale of the Australia and New Zealand commercial lending and leasing business, a measly 1.1%.

GE probably plans to make up the difference with other transactions. And indeed, some transactions contributed a much higher percentage to the goal. The sale of the company's Australia and New Zealand consumer finance business, for example, was valued at $4.2 billion in ENI, and released about $1.7 billion of capital (39.5% of ENI). The Synchrony Financial spinoff itself was worth $75 billion in ENI but resulted in $20.4 billion in reduced share count (27.2% of ENI). 

Time will tell
There's no just no concrete way to know for certain whether the company is getting good prices for its assets, or whether it's on track to meet its goal. One thing ENI can tell us, though, is that the rate of sales has been slowing down considerably.

In early December, almost eight months to the day since GE announced its plan, GE reported that it had signed deals worth about $146 billion in ENI. That's an average of about $18.5 billion in ENI per month.

Months went by with no reports of new transactions, but new reports have recently emerged. On April 11, the Financial Times reported that GE had signed deals worth about $165 billion in ENI.  That means GE signed deals to sell assets worth just $19 billion in ENI in the intervening months, an average of about $4.4 billion per month -- a far cry from the previous rate.

Where that leaves the company
If GE could maintain the recent rate of $4.4 billion in ENI in average asset sales per month, it would take under a year to dispose of the remaining $35 billion in ENI in assets. That would keep GE well ahead of its 2018 deadline, and even on pace to be "substantially done" by the end of 2016, as Sherin predicted.

But the rate seems likely to fall even further as more desirable assets get sold, leaving ones that are more difficult to get rid of. 

On the whole, though, it won't matter much to investors if a couple of straggling financial businesses languish on the balance sheet for a few years. In the short term, that might slightly affect the amount of cash the company can return to its shareholders. But in the long run, it's going to be the strengths of the company's core industrial businesses that pay off for investors. And that'll be true whether they're measured in ENI or not. 

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General Electric Company Stock Quote
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The Blackstone Group L.P. Stock Quote
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