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Life After Berkshire for GE

Aug 16, 2017
World Class Faculty & Research


General ElectricSMITH BRAIN TRUST — Revelation this week of Berkshire Hathaway dumping its $315 million stake in General Electric is stoking doubt in the blue chip stock. One analyst describes GE as "the dog of the Dow," citing Berkshire's selloff of its 10.6 million shares as an exclamation point to a year of the stock being the worst-performing member of the Dow Jones Industrial Average. While the Dow has been up 10 percent in 2017, GE has been down more than 20 percent.

Add fading sentiment as a descriptor. Consultant and data provider for media outlets Thomson First Call reports just eight of 16 GE-following analysts rate the shares a "buy" or better. That's down from 10 in May 2017 and a major shift since 2008, when Berkshire Hathaway first loaded up on GE stock. "GE is the symbol of American business to the world," Berkshire President, Chairman and CEO Warren Buffett said at the time. "I am confident that GE will continue to be successful in the years to come."

David Kass, clinical professor of finance at the University of Maryland's Robert H. Smith School of Business, says Buffett's influence drove the investment, which some have characterized as a lifeline to GE during the 2008 market upheaval. "The GE investment resulted from Buffett's reputation and personal relationships, and Berkshire's very large cash position during the financial crisis," Kass says in a recent GE profile at Kiplinger.

The outlook for GE has certainly soured since then, Kass tells Bloomberg. "The CEO essentially was forced to resign," he says, citing the recent departure of Jeff Immelt.

What went wrong? Part of the answer lies with Immelt's performance, Kass says. "His managerial decisions resulted in investing in projects that did not maximize shareholder value," Kass tells the Washington Post. "Did he choose the right portfolio of projects to maximize shareholder value? I question whether he did."

Positive Notes

New York Times coverage last month of GE's quarterly earnings report assessed the company as facing challenges but also as a "fundamentally strong company, with industry-leading businesses led by jet engines and electrical power generators ... and no longer one attached to a sprawling financial institution."

And a Seeking Alpha piece this week suggests that GE, despite Berkshire dumping it, is a solid investment proposition as an income vehicle. "Falling valuations also have a good side: The cash flow yield increases. ... [In GE's case], an investment comes with an entry dividend yield of 3.79 percent, and there is a strong chance that the 'yield on cost' will rise long term. Putting negative headlines aside, General Electric's dividend alone is worth buying."


Kass counters that investors in GE should want to earn a higher return than just 3.8 percent from its dividend. "There is risk at today's price," he says, "so the return over the next 12 months could be lower than 3.8 percent or even negative, especially if the stock market declines. Buffett's exit from GE and its poor performance over the past year are not encouraging."




About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.