Tuesday, July 08, 2008
Jeffrey Immelt's job may not be safe, but I believe GE's dividend is as safe as any stock I can think of. GE will be reporting its earning for the second quarter this week and the chorus of Wall Street analysts are singing in complete discord. There is wide disagreement over whether or not GE's mark-to-the-market problems are behind them at GE Credit, and whether or not they will make their earnings estimates. I believe GE will land on the good side of their earnings estimates and the heat will come off their stock for a while. Additionally, I believe GE is too big and too strong to continue on its descent as though it were only a financial stock. This is one of the greatest amalgamations of businesses the world has ever seen; if GE has lost his way, it is because Immelt has lost his way with a company that, as Peter Lynch of Fidelity used to say, "Any fool could run." I don't mean to minimize the complexity of the organization. From jet engines to wind turbines and gas powered electric generating plants; from medical imaging products to NBC, CNBC, and MSNBC, this company is the epitome of American ingenuity and power. It is safe, sure, sound, and secure, yet it has languished below $30 per shares since April, when they announced the shocking write off of loans in their GE Credit division. In the weeks that followed the write-offs, rumors flowed that the write off had already been recovered. If that is the case, GE will provide surprisingly good earnings this quarter, if not, Jeffrey Immelt's days are numbered. The reason is simple, he has the infamous "heir apparent" disease. He followed a legend in Jack Welch. That's tough enough, but Mr. Welch, who is trying to polish his own image, after an ugly divorce battle, seems to be throwing Mr. Immelt from the train. He has panned him on numerous occasions, only to say he was sorry later. It has been my observation that Jack Welch doesn't say things he doesn't mean. Saying he's sorry pales compared to his spearing Immelt on a regular basis. Immelt has a job much like we have at Donaldson Capital Management. He allocates capital. He runs an organization that is too large to manage. He manages the portfolio. The write-off blunder was an act of extreme mismanagement, because it means that his top lieutenants in the GE Credit division were not keeping him posted on the problems. If Immelt were a manager, he would be in the loop; as an asset allocator, he seemingly found out about the problem about the same time as we did, and that is not good enough. He is damaged goods and unless he can pull a rabbit or two out of his hat in the next couple of quarters, he will be history. GE's stock is still lower than it was the day that Immelt took over. GE is one of the proudest and toughest minded companies in the world; the results have not been forthcoming, Wall Street has not embraced Mr. Immelt, and Jeffrey's hairdo is beginning to look very colored and very coiffed. These are all signs that his days are numbered. Having said this, the dividend is safe. GE pays out only about half of their earnings in dividends, and their free cash flows are even bigger than their earnings. Indeed, GE raised their dividend earlier this year by over 10%. The dividend is safe, Immelt's job is not.