More Aggressive Than Expected Asset Sale at GE Capital Pushed GE Shares Ahead 10%

04/11/2015 10:15 am EST


Jim Jubak

Founder and Editor,

Though the sale of assets was not a surprise, the speed of the move was more aggressive than expected, and while MoneyShow's Jim Jubak thinks it is still a stock to own in your portfolio, the question remains, how do you characterize the company going forward?

Shares of General Electric (GE) rocketed higher Friday, April 10, climbing $2.84, or 11.02%, on news that the company would sell the real estate holdings of its GE Capital unit for $26.5 billion. The company's board has authorized a new share buyback program of up to $50 billion. If, after this news, anyone still cares about the April 17 release of first quarter earnings, the company confirmed guidance for operating earnings of $1.10 to $1.20 a share for its industrial business.

It's not like the sale of assets belonging to GE Capital was unexpected. The company has made it clear that it intends to sell assets in its GE Capital unit and to reduce the operation to a financing business that supports the company's industrial units such as jet engines and railroad locomotives.

But the speed of the move was more aggressive than expected and so was the decision to launch such a huge share repurchase program, partially funded by the asset sale. Most of the moves to shrink GE Capital to data have been much smaller incremental sales, such as the sale of the company's Australian and New Zealand consumer lending business. The deal announced Friday includes an agreement with Blackstone Group and Wells Fargo (WFC) that accounts for $23 billion in real estate assets. The remainder, General Electric said Friday, will come from ongoing talks with other potential buyers.

General Electric has been a member of my Dividend Income portfolio since February 2, 2012. Appreciation to the close on April 10 is 47.6%.

I think General Electric remains a stock to own in your portfolio. The reallocation of capital from the GE Capital unit to the company's industrial business means a potential doubling of return on investment since the industrial units aren't subject to the same reserve ratios as the financial business is. (Regulators decided that GE Capital was a systemically important financial company and that upped the capital the unit was required to keep in reserve.)

The question at this point is how to characterize General Electric going forward. I had put the stock in my dividend income portfolio on the strength of a yield above 3% that looked like it was headed higher. Now, the company might be better characterized as investment in share price appreciation, and as such, maybe I should move it from the dividend portfolio to Jubak's Picks.

I'm going to wait for the conference call after the April 17 earnings report to see what the company says about its dividend policy going forward before I make that decision. I'll have a new target price after earnings as well.

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