A year ago, I wrote about the worrying increase in leverage among America’s blue chips caused by share repurchases (“Hollowed-out blue chips are the next subprime, November 13, 2017). Today I wanted to return to the subject because the travails of GE (NYSE: GE) are a reliable advance signal of the trouble ahead for the large corporate sector of the U.S. economy.
GE was one of Wall Street’s major share buyback operators between 2015 and 2017; it repurchased $40 billion of shares at prices between $20 and $32. The share price is now $8.60, so the company has liquidated between $23 billion and $29 billion of its shareholders’ money on this utterly futile activity alone. Since the highest Net Income recorded by the company during those years was $8.8 billion in 2016, with 2015 and 2017 recording a loss, it has managed to lose more on its share repurchases during those three years than it made in operations, by a substantial margin.
Even more important, GE has now left itself with minus $48 billion in tangible net worth at September 30, with actual genuine tangible debt of close to $100 billion. As the new CEO Larry Culp told CNBC on Monday “We have no higher priority right now than bringing those leverage levels down.” The following day, GE announced the sale of 15% of its oil services arm Baker Hughes, for a round $4 billion. Of course, since that sale values Baker Hughes at $26 billion, and GE paid $32 billion for 62% of Baker Hughes as recently as last year, which looks to me like a valuation for the whole company of $52 billion, GE shareholders appears to have lost half the value of their investment in Baker Hughes in about 18 months.
As I have said several times, GE has been abominably managed since the odious “Neutron Jack” Welch took over in 1981; let us hope that Culp, who had a fine track record at Danaher, can turn it around. The GE situation reminds me of another overvalued conglomerate, based in the railroad sector, that had been one of the bluest of blue chips, which slithered into bankruptcy over a period of about two years, via a series of divestitures at fire-sale prices, each of which appeared to have enabled the company to “turn the corner.” Its bankruptcy was unthinkable — until it happened, shaking market confidence for the next year, especially in the commercial paper market, and tipping off a considerable recession.
