UPDATE: This article, originally published at 6:33 a.m. EDT Friday, May 8, has been updated with dividend history and yield information.
NEW YORK (TheStreet) -- General Electric (GE - Get Report) CEO Jeffrey Immelt will be playing a delicate balancing act over the next three years as he sells off parts of the GE Capital finance unit while funding a share buyback of up to $50 billion.
The repurchase is part of GE's plan to keep the conglomerate's stock price level through 2018 while winding down the lucrative finance unit. GE Capital generated about a third of the parent company's sales last year, so selling off most of it will squeeze earnings and potentially drag down the stock price.
The good news is that because of high interest in what GE is selling, analysts say Immelt may be able to execute his plan faster than he predicts.
"GE was very bullish about the interest level in asset sales," Scott Davis, a Barclays analyst, said in a report for investors on April 20. "We believe GE will likely complete these asset sales quicker" than the three years in the company's timetable. GE has said that it hopes to complete the bulk of U.S. asset sales by the end of 2016.
Immelt, who has been trimming GE Capital since the financial crisis, originally planned to reduce it to 25% of total earnings by 2018 but surprised investors in April by cutting that share to 10%.
The sudden shift was spurred by a chain of events, starting with the spinoff of Synchrony, formerly GE Capital's retail finance unit, which showed that investors valued financial businesses more highly outside the GE umbrella, Keith Sherin, the head of GE Capital, said on an April 10 call with stockholders and analysts.
At the same time, GE Capital's lending model had become less competitive with banks. Then, in February, the government released guidelines on the "systemically important" risk tag applied to GE Capital in 2013 that gave the company a path to shedding that designation and the regulatory requirements that went along with it, Sherin said.
GE "sees speed as the biggest single risk associated with price and value" of the businesses it's selling, Henry Kirn, an analyst with Societe Generale, said in a report April 20. "The company is going to evaluate level of interest in" individual businesses and balance selling those at potentially higher prices against making several large package deals, he said.
Using the money from those deals for the $50 billion buyback will return cash to shareholders and may buoy the price of remaining shares. GE plans to further reduce the number of outstanding shares -- which would help it meet its earnings-per-share goal for 2018 -- by letting investors swap them for stock in Synchrony.
GE still owns 85% of Synchrony, which it plans to unload by offering Synchrony shares to GE investors in a tax-free exchange for GE stock. Retiring that stock would let GE return about $20 billion to shareholders because the remaining shares would be worth more on the open market and would receive higher dividends as the amount dedicated for payments would be spread over a smaller pool. CFO Jeff Borstein said the company expects dividend increases as early as 2016.
Including that exchange, as well as dividend payments, GE says it may return as much as $90 billion to investors through 2018. In the process, the company will scoop up about 2 billion of its approximately 10 billion shares outstanding, or about 20%.
GE's quarterly dividend of 23 cents a share would give an annual yield of about 3.4% at current stock prices. Reducing the number of outstanding shares to about 8 billion and paying out the same amount of cash would mean a dividend of about 29 cents a share. That's close to the pre-financial crisis dividend of 31 cents a share, which the company slashed by two-thirds in 2009.
Still, some investors say spending $50 billion on a buyback is a step in the wrong direction. They argue that the new-found cash reserves would be better spent building GE's industrial units, especially since rivals Honeywell (HON - Get Report) and United Technologies (UTX - Get Report) have been widening their market share at a faster clip than GE.
In contrast to GE's plodding recovery from the financial crisis, Honeywell and United Technologies shares have risen significantly from their pre-crisis peaks, by 62% and 41%, respectively. GE shares are 36% below their 2007 highs.
"They've underperformed their peer group," said Ivan Feinseth, chief investment officer with Tigress Financial Partners in New York. "Buybacks are a short-term fix, but it doesn't cure the long-term problem."
The underperformance is one reason winding down GE Capital is strategically important: It eliminates the drag on the parent company's stock that followed the financial crisis when investors avoided GE because of the heightened risks.
"In the 90s and early 2000s, the reason to buy GE was GE Capital," Feinseth said. "After 2007, the reason to sell GE has been GE Capital. And now Jeff Immelt has decided to realign its key core businesses."
GE Capital generated more than 28% of the parent company's operating earnings last year, compared with about 41% in 2007, before the crisis wreaked disproportionate havoc on the Fairfield, Conn.-based company compared with its industrial peers.
Shareholders cheered Immelt's decision to spin off most of GE Capital, and shares jumped more than 10% after the April 10 announcement that GE was returning to its industrial roots. More than a century old, the company traces its history to Thomas Edison's invention of the first practical light bulb in the late 19th century.
GE began its spinoff in April with the sale of the finance unit's real estate division to Blackstone and Wells Fargo for $23 billion. Also up for sale is a $74 billion portfolio of commercial loans and leases, in which Wells Fargo and other buyers have expressed interest, according to a person familiar with talks. The pared-down version of GE Capital that remains after all the asset sales will focus on lending to the company's aviation, health care and energy customers.
Immelt still has a ways to go to achieve his goal of generating 90% of earnings from industrials by 2018. The company is confident that it can meet its earnings-per-share forecast for that year, which Immelt said would be "substantially higher" than the $1.80 projected for this year, without providing a specific number. Kirn, of Societe Generale, said earnings in 2018 will likely be $2 a share or more.
Immelt has two ways of conducting the $50 billion buyback over the next few years, and both have potential pitfalls. GE can either approach select investor groups with a tender offer at a set price, which will likely be at a premium to the market rate, or it can purchase on the open market, risking black-out periods and volume restrictions mandated by the Securities and Exchange Commission. The agency caps repurchases on the open market at 25% of average daily trading volume, according to both SEC rules and GE.
Using an average of 34.6 million shares a day measured by Bloomberg in the four weeks before GE's announcement, the maximum GE could purchase each day would be 8.65 million. GE didn't immediately comment on the exact amount of the cap.
Davis, of Barclays Capital, said in his report that the "key catalyst for the stock" would be the speed at which the company can execute the sale of GE Capital. Barclays has an overweight rating, the equivalent of a buy, on GE stock.
If sales close faster than investors expect, the gains will be reflected in the share price, while any delay or failure to close sales will continue to drag on the stock, he said.
Source: General Electric investor presentation