General Electric (GE) was pummeled after reporting disappointing Q3 2017 earnings. New CEO John Flannery promised to right the ship, yet problems continue to materialize. The latest issue – an potential pension shortfall of over $30 billion – could be the final straw:
Not only does GE have the largest pension deficit among S&P 500 companies, that deficit is $11 billion worse than the next closest company, according to Dow Jones S&P Indices. (The $31 billion figure is from the end of 2016. Fresher numbers haven’t been released.)
GE’s pension nightmare is the result of years of inattention, and of historically low interest rates that have driven up pension liabilities around the world.
GE has over 600,000 current and former employees who rely on pension benefits. GE had a pension surplus of over $15 billion as far back as 2007. It had a shortfall of $6.8 billion in 2008, which grew to $31 billion at the end of 2016.
Instead of addressing the pension shortfall that materialized in 2008 former CEO Jeffrey Immelt led the company on an acquisition spree that failed to offset GE’s de-emphasis on financial services. The company spent over $10 billion to string together a hodge podge of oil & gas assets. It recently merged GE Oil & Gas with Baker Hughes to form Baker Hughes, A GE Company (BHGE); GE maintains a majority stake in BHGE.
GE’s $10 billion acquisition of Alstom’s Power division is now considered a failure. Management was caught unaware by a shift in demand for heavy duty gas turbines from 46 gigawatt to 40 gigawatt. Power Systems is now being disrupted by renewable energy and GE recently announced layoffs of 12,000 in order to rightsize the business. The major question is, “Can GE make up the short fall with assets on hand?”
GE’s Liquidity Could Appears To Be Waning
At Q3 GE had cash and equivalents of about $40 billion; $27 billion was held at GE Capital and $13 billion at GE. Though its liquidity exceeds its pension shortfall the company’s cash flow appears to be waning. In Q3 2017 GE generated cash flows from operations of $465 million. That pales in comparison to the $7.6 billion it generated in the year-earlier period. The major difference is that the parent received dividends of $5.1 billion from GE Capital in Q3 2016. In the past dividend payouts exceeded GE’s free cash flow. GE recently cut its dividend payout of $0.96 per share ($8.4 billion) in half. Dividends from GE Capital have been halted until management can sort out appropriate reserving levels at GE Capital’s long-term care business.
Last week GE announced an $6.4 billion after-tax charge related to its insurance operations and intimated it needed to make $15 billion in reserve contributions over the next seven years. Most of the reserve increases were related to its long-term care business, which has suffered from lower than expected investment returns, an aging population and more policyholders reaching claim status. That said, reserve additions could hamper upstream dividends from GE Capital to the parent company for years to come.
Time For An Equity Raise?
Central bankers’ record low interest rates have helped spur financial markets, yet may have created problems in other areas. Low rates have hurt the long-term investment returns for pension funds and companies offering long-term care policies. However, low rates and tax cuts have buoyed financial markets, which continue to set new highs each week. Over the past year the S&P 500 (SPY) is up over 20%, while GE is off over 45% over that time frame.
Nonetheless, GE still has an equity market capitalization of over $140 billion. It could be prudent to raise equity to help shore up its balance sheet, fund its pension shortfall, and fund reserve requirements at its insurance operations. If equity markets ever turn down due to a lack of additional stimuli, it could take GE with it.
Conclusion
A pension shortfall of $30 billion in addition to reserve requirements at GE Capital’s insurance operations could a major headwind. GE remains a sell.
Actor Chad L. Coleman will host Trump And The Global Economy February 6, 2018 in Brooklyn. The panel will include Christopher Townley (land baron), Reverend Conrad Tillard (activist, WHCR 90.3 FM), Wuyi Jacobs (AfrobeatRadio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead. The event will take place at South Oxford Space in Fort Greene, Brooklyn from 6PM – 8PM. Tickets are available on Eventbrite. Come early and bring friends.
Coleman is best known for his breakout role as Tyreese in The Walking Dead and Dennis ‘Cutty’ Wise in The Wire. He currently recurs on Syfy’s The Expanse and will star in Lifetime’s upcoming biopic Michael Jackson: Searching for Neverland set to premiere May 29.
According to Ralph Baker who Helped found the event, “We are excited to work with Chad to help spread the word about Trump And The Global Economy. These are trying times we live in and the community is dependent on artists like Mr. Coleman to continue to tell our stories through their music, film, plays, books, etc. Brooklyn has a Rich, vibrant, art community. We would love for the art world and the broader community come out to network and take in what the panel has to say.”
The town hall brings together a cross-section of individuals to discuss everything from President Trump’s policies on economics, immigration, and foreign affairs, to what his election says about America. Individuals on the front lines will bring you real information about the Trump administration that impacts the community.
The most recent Trump And The Global Economy town hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Mr. Jacobs and Mr. Baker. The event was well-received by the community. We parsed through President Trump’s proposed tax plan and high net worth individuals could potentially game the system by shifting income around. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?
The June 27 2017 event included Mr. Tillard, John McLaughin, who did the polling for President Donald Trump during his presidential election, Mr. Jacobs and Mr. Baker. Trump And The Global Economy is a quarterly event and is fast becoming the “must see” event in Brooklyn.
Live Stream Available February 6, 2018 At 6PM
Live stream for the February event is below. The live stream will be active February 6th at 6PM.
