As we showed previously, the main reason stocks soared in February after the worst January in years, is that companies announced a record $100 billion in stock buybacks in the month even as both earnings and the US economy continued to sharply deteriorate .
Moments ago, General Electric (GE) showed why April is much more likely to be a rerun of February than January or March when it announced that it would go ahead and repurchase half of the total record stock buybacks announced in February, or some $50 billion in what may be the largest stock buyback announcement in history!
How will GE fund this massive distribution to its shareholders, of which the most concentrated one will once again be the biggest winners? Simple: by dumping the division that nearly caused its insolvency during the financial crisis, the hedge fund known as GE Capital. As part of the just announced mega transaction, GE announced an agreement to sell the bulk of the assets of GE Capital Real Estate to funds managed by Blackstone. Wells Fargo (WFC) will acquire a portion of the performing loans at closing.
The Company also has letters of intent with other buyers for an additional $4 billion of commercial real estate assets. In total, these transactions are valued at approximately $26.5 billion.
Following what is essentially a spin off, GE expects that by 2018 more than 90 percent of its earnings will be generated by its industrial businesses, up from 58% in 2014. Or, as someone put it, GE will be far less General and almost entirely Electric.
What is odd is that as the chart below shows, GE shareholders were not lacking in the buyback back department:
But now it has truly taken balance sheet engineering to the next level as the company will no doubt be forced to lever up massively as it loses a main source of cash flow if it wants to preserve its shareholder friendly status. In fact, it wouldn’t be surprising if GE suddenly became an acquisition target before it loads up its balance sheet with billions in junk bonds.
From the press release:
GE to Create Simpler, More Valuable Industrial Company by Selling Most GE Capital Assets; Potential to Return More Than $90 Billion to Investors Through 2018 in Dividends, Buyback & Synchrony Exchange
- High-value industrials to comprise more than 90% of GE earnings by 2018
- Plans to retain financing “verticals†that relate to GE’s industrial businesses
- Announces sale of GE Capital Real Estate assets for approximately $26.5 billion
- Will work with regulators to terminate GE Capital’s SIFI designation
- GE to take approximately $16 billion after-tax charge in 1Q’15, $12 billion non-cash
- Industrial businesses remain on track for operating earnings per share of $1.10-$1.20 in 2015, in line with expectations
- GE expects to get approximately $35 billion in dividends from GE Capital from this plan
- Board authorizes new buyback program of up to $50 billion
