GE Hints At Spin-Off After Insurance Line Faces $6.2B Charge

According to a Reuters report, General Electric Company (NYSE:GE) is seriously contemplating to spin off its operations to maximize shareholder returns after taking a hit of $6.2 billion in the fourth quarter from the legacy insurance business. Following the news, the stock fell 2.9% to close at $18.21 yesterday.

The insurance problems for the beleaguered industrial goods manufacturer have largely stemmed from its presence in the long-term care policy market that caters to healthcare costs related to nursing homes and assisted living. Although GE has mostly exited its financial businesses in the aftermath of recession, it has continued with this reinsurance business albeit without any new insurance policy since 2006.

Estimates reveal that GE will require capital contributions to the tune of $15 billion over seven years due to an increase in the life expectancy of the aging population. These long-term care policies usually date back to decades and have grossly underestimated projected healthcare costs and life spans, hurting the exchequer of companies like GE.

This has also severely impaired CEO John Flannery’s plans to script a turnaround in the company, with 2018 being termed as a “reset year”. Flannery had earlier disclosed his plans to focus on just three core segments — power, aviation and health-care equipment — and gradually exit all other businesses to plug the downtrend. In addition, GE aimed to reduce overhead costs by $2 billion in 2018, majority of which is likely to come from the power segment that sells electrical generation equipment. The company further intends to sell assets worth $20 billion to improve its liquidity.

Also, the company halved its quarterly dividend to 12 cents per share — the first dividend cut since 2009 at the peak of the recession. For 2018, the dividend allocation will be $4.2 billion, down from more than 100% of free cash flow to 60-70% while the dividend yield will be trimmed from 4.7% to 2.3%. A healthy dividend yield was one of the strongest enticements for GE investors and the dramatic plunge in share prices are testament to the fact that shareholders have been very critical of the turnaround plan.

For 2017, the company has lowered its adjusted earnings guidance to $1.04-$1.12 per share from $1.60-$1.70. For 2018, GE expects adjusted earnings to be further down to $1.00-$1.07 per share and free cash flow at significantly reduced levels of $6 billion to $7 billion.

The company further intends to lay off 12,000 employees across the globe in its GE Power business, as part of its corporate objective to lower operating costs and improve profitability. The drastic steps seem to be the call of the hour as the company aims to restructure its business in tune with the evolving market conditions.

Incidentally, GE was the worst performer of the Dow Jones Industrial Average in 2017, tanking 44.8% in the year. Shares of GE have also underperformed the industry in the last three months, with an average loss of 21.4% against a gain of 1.1% for the latter. Whether a radical spin off for smaller nimbler entities can actually be beneficial to shareholders remains to be seen.

GE has a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the industry include Raven Industries, Inc. (NASDAQ:RAVN) , 3M Company (NYSE:MMM) and Leucadia National Corporation (NYSE:LUK) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Raven has a long-term earnings growth expectation of 10%. It surpassed estimates thrice in the trailing four quarters with an average positive surprise of 25.8%.

3M has a long-term earnings growth expectation of 10.2%. It delivered earnings beat thrice in the trailing four quarters with an average positive surprise of 2.5%.

Leucadia has an expected long-term earnings growth rate of 18%. It exceeded estimates thrice in the last four quarters with an average beat of 21.2%.

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