Immelt Pushes Harder to Shrink GE Capital

NEW YORK ( TheStreet) -- General Electric ( GE) has made great progress in shrinking GE Capital, and CEO Jeff Immelt on Tuesday said the company was considering spinoffs through public offerings as a way to meet its goals.

GE reported first-quarter operating earnings of $4.059 billion, or 39 cents a share, increasing from $3.567 billion, or 34 cents a share, during the first quarter of 2012. GE Capital contributed profit of $1.927 billion, or 47% of the parent company's operating earnings.

Immelt has long stated that GE's goal is to grow its industrial earnings and shrink GE Capital sufficiently to have the conglomerate deriving 70% of earnings from its industrial business.

GE Capital had $524.0 billion in total assets as of March 31, declining from $573.4 billion a year earlier, in keeping with the company's plan to reduce the size and risk of its finance business. Excluding non-interest bearing liabilities, cash and equivalents, the finance unit's "ending net investment" was $402 billion as of March 31, declining from $436 billion a year earlier, and well below Immelt's earlier initial target of $425 billion.

When speaking about GE Capital's success in shrinking its balance sheet, GE CFO Keith Sherin said during the company's earnings conference call on April 19 that there were "not a lot of huge transactions there," but that the finance unit was continuing to see a runoff of noncore assets. Increasing real estate values were also enabling GE Capital to mark additional assets to sell by the end of 2013.

But Immelt now wishes to shrink GE Capital's ENI to a range of $300 billion to $350 billion by the end of 2014. "That is going to create excess cash in GE Capital, and we are going to use that excess cash to buy back stock. We would like to get our share count down to 9 billion to 9.5 billion shares by the end of '15." Immelt expects share buybacks to total $10 billion this year.

GE Capital is GE's cash cow. The finance unit announced last week a plan to pay $6.5 billion in dividends to the parent company during 2013, increasing from $6.4 billion in 2012.

GE Capital aims to pay regular quarterly dividends of 30% of earnings to the parent company. Special dividends are expected to total $4.5 billion this year.

Immelt was typically cautious in his comments about significant moves the company might take to shrink GE Capital further during a conference presentation on Tuesday, according to a transcript provided by Thomson Reuters. "What we are saying to investors today is that we have got the next phase outlined, getting the portfolio down to -- or getting the ENI down to $300 billion to $350 billion . . . continue to do run-off of non-core assets, to basically look at some staged exits of value-maximizing platforms."

"Staged exits" could mean one or more spinoffs through public offerings. Immelt said "the capital markets are very receptive to IPOs . . . So I think you basically have as good a setting as you could possibly have."

By saying "our idea is to be closer to a commercial finance core," Immelt hinted that the GE Capital was considering a move to spin off its private label credit card (PLCC) business and its consumer finance unit. He also indicated that an IPO process will take some time, as it will "require us to be in sync with how our regulator looks at the financial service business and things like that."

Bank of America Merrill Lynch analyst Erika Penala in a note to clients early this month suggested that Citigroup ( C) was " the most logical bidder" for GE Capital's $31 billion private label card portfolio.

In a report on Thursday, Bank of America Merrill Lynch analyst Andrew Obin wrote that "the IPO discussion does not necessarily preclude the company from exploring divestiture options, which we think are still on the table for the right price.

"We calculate that the buyback would not fully offset high-return PLCC divestiture dilution in the first year, though we think portfolio reshaping would be well-received by investors, as management eliminates risk from higher-leverage non-core finance holdings," Obin wrote.

Continuing on his generally positive theme, Obin wrote that "GE's ability to extract more incremental cash from GECC ahead of the SIFI designation is indicative of a constructive relationship with the regulators."

GE Capital's expected designation as a "systemically important financial institution," or SIFI, will bring it under direct supervision by the Federal Reserve, including participation in the regulator's annual financial holding company stress tests.

Obin rates General Electric a "buy," with price objective of $25, estimating the company will earn $1.67 a share this year, with EPS growing to $1.81 in 2014 and $1.99 in 2015.

GE's shares closed at $23.86 Wednesday, returning 15% this year, following a 21% return during 2012. The shares trade for 13.1 times the consensus 2014 EPS estimate of $1.82.

Based on a quarterly payout of 19 cents, the shares have a dividend yield of 3.20%.

GE Chart GE data by YCharts

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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