Tuesday, February 14, 2012

What's the Deal with GE?

General Electric, on the one hand, is criticized by those on the left for not paying Corporate Income Taxes.   But on the other hand, the company is loaded up with debt and the stock price is in the tank.  Wild profits, or teetering on the brink of bankruptcy?  It is hard to figure out!

Will GE go bankrupt?  If you Google this online, all you find are alarmist articles on Teaparty and Ron Paul websites - from 2009 when everything looked to go bankrupt.  And some of these articles appear to be cut-and-paste copies of one another.

I don't place much faith in tea partiers or people who really think Ron Paul would make a good President.  These are not deep thinkers or indeed, realists - or even people with a tenuous grip on reality. So we have to look elsewhere.

But before we do, let's look at the alarmist predictions and see if there is any merit to them.
The numbers are staggering! Over $660 Billion in debt. That is almost the entire US federal bail out package that was passed during the financial crisis last year. All for one, albeit very large, company. That company is General Electric. GE has over 300,000 employees and operates in more than 100 countries. Can it really go bankrupt? The answer is yes!
Well, maybe those numbers were accurate in 2009.  Today, according to eTrade, their long-term debt is at $450 Billion, and even at its max in 2007 was at $550 Billion.  So these Ron Paul people are padding by $100 Billion, at least.  And since the dark days of the recession of 2009, GE has have managed to pay off $100 Billion in debt, which is pretty impressive, if you think about it.

The company has a P/E ratio of about 15.  The stock is trading at about $19 a share and there are 10.6 Billion shares outstanding.   If my calculator is right, that means it is earning about $1.26 per share, or about 13.42 Billion a year, which, as the Occupy Wall Street crowd likes to point out, is tax-free.

The dividend yield is 3.61%, paying a quarterly dividend of 17 cents, which at 10.6 Billion shares comes to about 7.2 Billion dollars in dividends.  This leaves a pretty large cushion of about 6 Billion in retained earnings.

Still, $450 Billion is a lot of debt, even if interest rates are very low, right?
In March of last year GE lost their prized AAA credit rating from Standard and Poor rating agency. Other agencies have them ranked much lower. John Atkins, a fixed-income analyst at IDEAGlobal.com, said “it remained unclear what the impact will be on GE’s borrowing costs. Even with the ‘AAA’ credit rating, the cost of insuring debt of GE Capital had been in distressed territory recently.” This is a dramatic understatement. In fact, last year, the U.S. government had to guarantee $500 billion in GE’s debt. GE’s interest on its debts are about to soar.
Well, I don't know when "last year" was - 2009?  Today, they are rated AA by Standard and Poors and Aa2 or Aa3 by Moodys.  Perhaps a notch or two lower than premiere investment grade, but hardly junk bond ratings.

Tellingly, the price of their bonds remains high.  They have a lot of outstanding bonds, at coupon rates of 2.125 to 8.125.  But the effective yields on these are very low - at the rate of fractions of percentage points.  What does this mean?  Well, unlike Mohegan Casino Bonds, investors are confident they will be paid back - thus driving up the price of the bonds so that their effective yield is below the coupon rate.  That is a pretty impressive credential, right there.
As Porter Stansberry said in November of 2009, with the guarantee, GE only spent roughly $17 billion last year to service its $660+ Billion in debt. That’s an annualized interest rate of 2.5%. This is not sustainable. Sooner or later, GE is going to have to pay a market interest rate. The government guarantee expires in 2011 and that is when you can expect costs to soar.
OK, it is 2012, and that hasn't happened yet.  If you buy a GE bond today, the rate of return is pretty low, actually.  Again, they seem to be exaggerating numbers, if not in fact pulling them out of their ass.
Currently, the yield on high-yield corporate debt is around 10%. GE is now rated two slots above “junk” by Egan Jones. Assuming that GE could still qualify as an investment-grade credit – (since there is some discrepancy between ratings agencies) GE would pay something like 8% on its debt in a free market.
Well, I don't know about Egan Jones, but Standard and Poor's and Moody's are rating it one notch below top grade - AA+ and Aa2 or Aaa in most cases.  So it doesn't look like that is panning out, either.  And the coupon rate on AA+ bonds seems to be a lot lower than 10% - more like 3-4% at best.  Again, it never hurts to just make shit up when you want to make a point.
That would cost more than $52 billion a year. Last year, GE earned $11 billion before interest and taxes – in total. That’s not nearly enough money to pay the interest on its debts – whether they’re backed by the government or not.
 Well, GE ain't paying a lot of taxes, and earnings seem to be up to $13 Billion these days.  But "earnings" is a vague term.  Does that mean gross receipts (NO) or net profit (Not Quite) or "Earnings Before Interest Taxes Depreciation and Amortization (EBITDA)?

Even if the latter, this statement makes no sense.   If you look at the EBITDA numbers for GE, they are higher than 11 Billion for the last five years, at least.  In fact, the comment above is taking the net earnings not the EBITDA values - which are actually higher.  The poster seems to think that net earnings are LESS than EBITDA values, which "back out" taxes, interest, depreciation and amortization.   GE made 11 Billion after paying the interest on their debts.  So not only do the have enough money to service their debts, they have 11 Billion left over.  Hmmmm.... maybe taking advice from Ron Paul websites is a bad idea?
Check back tomorrow and I’ll show you one way to play General Electric that has already earned 40% returns in just 2 weeks, but has much more to go.
Ah!  The punchline!  They are selling some sort of stock scheme!   I shoulda thunk it.  Some sort of short-sale scheme bootstrapped by posting negative messages about the company.

Let me guess, they are selling Gold, too, am I right?  Am I?  Huh?  Thought so!

So what is going on here?  Why is G.E. such a poster boy for bashing by the far left ("They don't pay enough taxes!") and the far right ("They are going bankrupt!").  I think it is the same-old same-old.  People resent large companies because they are large.  Notice how in the diatribe excerpted above that the first thing they mention is that GE has 300,000 employees in 11 countries?  Oh, beware, my lord, of jealousy.  'Tis the green-eyed monster that doth mock the meat it feeds upon....

G.E. is clearly facing some troubles these day  - aren't we all?  But it has a solid income stream, and given today's low interest rates and its pretty decent bond ratings, seems poised to pay down some of its debt.  Heck, it has knocked $100 Billion off its debt load in the last two years.  How much have you paid off your credit cards in that time?

So while the stock is tanking, I think I will hang onto it - and my GE Bonds - for now.  Like anything else, I don't own so much of it that I worry about losing it all.  Diversify, Diversify, Diversify!

Things could change, down the road, if interest rates on bonds rise dramatically.  However, at the present time, it appears that not only are they servicing their debt, they are paying it down a bit.  Whether they will keep this up is anyone's guess.  I suspect the uncertainty is one reason the price of the stock keeps getting hammered.

1 comment:

  1. Update, July 2013: GE bonds are worth about 40% more than when I wrote this piece. My GE stock is still down 35% from what I paid for it, but it is increasing in value and continues to pay dividends. I'm not selling it, only because if I did, I would just use the money to buy......GE stock.

    Listening to Ron Paul websites for investment advice - or the shouting guy or the finance channel, is never a good idea.

    ReplyDelete

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