Well, speaking for myself, it’s nice to receive a reply from you, Spekulatius. It’s been quite a while since we exchanged views.
The way I see it, in whatever way GE "makes a living", it’s Total Revenue and Total Expenses must, to all intents and purposes, be reflected in its Financial Statements, and most particularly in its Income Statement. I’m sure you don’t need to be told that.
IMO, what we have with GE is a clever way of incurring ‘cost’, viz. a very high ‘Interest Expense’, in order to reduce its Income Tax burden, seeing as "Interest Expense" appears before "Profit" on the I.S.
However, this is, IMO, to the detriment of Shareholders, because of the negative effect it has on a potential Dividend to those very same Shareholders.
I suggest that this may have contributed more to GE’s down trend in stock price than your contention of "large cap malaise".
Personally, such an ‘esoteric’ reason doesn’t form part of my stock analysis strategy. I prefer to consider the "hard numbers" that appear in Financial Statements !
At this stage it seems that GE is far more interested in generating "inner company wealth", rather than producing greater income for Shareholders.
IMO, if GE stuck more to the business that it knows best, such as manufacturing things "electric", and produced the same current Turnover, but with far less Interest Expense, then this would be of greater, personal benefit to Shareholders in terms of a greater Dividend.
GE could still borrow money from the bank, using its AAA credit, for such things as Capital Equipment, Marketing of Products, R&D, etc.. etc.., but this amount, however substantial, could form a far lower percentage as related to Shareholder’s Equity, which, in turn, would incur lower Interest Expense as is current, and thereby increase its Bottom Line, albeit that GE may have to pay a bit more in Income Tax.
Based on GE’s last set of Annuals, I, personally, wouldn’t have much of a problem with an Interest Expense of about $5bil. Using a 7% ratio of Int. Exp. to LTD, that would give GE about $70bil. to $75bil. in bank loans. With everything else staying much the same, GE’s Tax would go up from $3.85bil. to about $5.7bil.
Its pre-tax Return on Capital Employed would improve to about 10%, compared to a very slim 5%.
However, more importantly for Shareholders, the value of its Bottom Line would be of the order of $24bil., adding about 45% to their Dividend Income.
I don’t know about you, but in such a situation I would be more inclined to consider becoming a GE Shareholder !! |
