Well CrazyPete, I take your point that GE Capital may be the more successful arm of its business. But the way I see it, GE’s Financial Statements appear as those of an Industrial type company, and, as such, it has an item for 'Interest Expense'.
Now, to the best of my knowledge (and correct me if you believe I’m wrong), 'Interest Expense' is what a company has to pay in interest for money that it has borrowed, irrespective of where it has borrowed it. Therefore it gets deducted from Turnover. And therefore it will reduce the Bottom Line, and will also reduce the amount of Dividend that the company will pay to Shareholders (provided, of course, that it generally pays a dividend, which, it seems, is the case with GE).
And, apart from the likes of Prefs., Debentures etc.., the only way to make money from your shares is if you sell them or if you get paid a Dividend.
Taking GE’s last Annual Result as an example, it reported a Bottom Line of $16.35bil. Its Interest Expense was $15.187bil. before tax, and about $12.65bil. after tax. Its Dividend Cover was about 1.44. Therefore the amount that would probably have been allocated for a Dividend to Shareholders would have been $12.65bil./1.44 = $8.8bil. That would have given Shareholders an extra dividend of about $0.84c/share, which is an increase of about 77%.
Of course, I wouldn’t expect a company the size of GE to have no debt Interest Expense. But, for example, by cutting that expense in half, GE’s shareholders would still have pocketed a potential 38% more in Dividend payment.
You call GE’s Interest Expense a "red herring". Well, personally, I call it a financial fact.
Needless to say, we each have our own strategy as to how we value a company.
Personally, I like to look at the ratio of LTD to Shareholder’s Equity. If that is bigger than a certain value I look at how that debt is affecting matters on the Income Statement, especially with regard to EBITDA. If that’s not too high, I let it ride. However, in GE’s case, in my opinion, it’s far too high, with too much of an adverse effect on the Bottom Line, which is the point I was making in my Message 24421.
It seems, for whatever reason, that investors have not been that enthusiastic about GE’s stock in the last year and a half. Looking at GE’s chart we see lower highs and lower lows which, I believe, is defined as a down trend. |
