GE Will Spend Up to $10 Billion to Repurchase Its Own Stock
General Electric Co., cash-rich and seeking to win further favor with shareholders, said Friday that it plans to spend as much as $10 billion over the next five years to repurchase its own stock.
The huge buyback is evidence that GE believes it is generating more than enough cash to sustain growth and is a signal that, after years on the prowl, it is no longer actively searching for a multibillion-dollar acquisition. The manufacturing and financial services conglomerate also increased its dividend 15%, to 47 cents a share.
“We don’t see a blockbuster acquisition ahead,” John F. Welch Jr., GE’s chairman, told securities analysts at a meeting Friday afternoon. “We’ve reached the conclusion that GE stock is the best investment we can make.”
A $10-billion stock buy would reduce the cumulative value of GE’s outstanding shares by 18% and would probably increase the value of each share. In dollar value, the buyback is the largest ever announced by a company, although the five-year term of the repurchase is longer than most.
Michael Howe, an analyst with the Butcher & Singer brokerage in Philadelphia, also noted that a number of other companies have repurchased larger portions of their stock market value; last year, General Signal bought back stock worth more than 30% of the total, he said.
The buyback announcement had a predictable reaction on Wall Street, which bid up GE stock $2 a share to a close of $59.50. Volume was 3.11 million shares. The news generally gave a push to the stock market, where the Dow Jones industrial index closed up 17 points.
However, GE attached several caveats to the buyback plan. Company officials said “unfavorable economic conditions” or an unexpected acquisition might change their plans.
But Welch stressed that the economy looks “solid.” And only a very tempting acquisition target--such as RCA Corp., which GE bought in 1986--could persuade the company to change its current thinking on takeovers, he added. “We’re not looking for new businesses,” he said.
Since he took over GE in 1982, Welch has reshaped the world’s 10th-largest industrial corporation, trimming it from 100 sometimes-marginal operations to 14 businesses with strong positions in their markets. The businesses include aircraft engines, financial services, medical imaging equipment, appliances, lighting and broadcast television.
Welch has sold $19 billion worth of assets in this decade and purchased $16 billion worth, notably including RCA, with its NBC Television unit, and the Kidder, Peabody & Co. investment firm. Earnings per share have been rising at an annual rate of 7.6% a share, contrasted with 4.9% a year under Welch’s predecessor.
Even after GE reinvests about $6 billion a year in the company, its far-flung operations generate another $2 billion in cash each year.
Analysts noted that the buyback would make GE look good to investors in several ways. It should continue to help the stock price and will improve the return-on-equity and return-on-investment ratios that Wall Street follows closely, they said.
“Every chief executive considers the stock price a sort of report card, and this should help Jack Welch’s,” said Linda M. Shuman, analyst with Prudential Bache Securities. She predicted that the buyback might boost GE’s per-share growth by as much as 2% a year.
GE insisted that the buyback does not mean that it is dissatisfied with its current stock price. But some analysts disagreed, contending that GE officials have wished that Wall Street had a fuller appreciation of the company’s financial progress.
At Friday’s closing price, the stock was trading at slightly under 14 times expected 1989 earnings. By comparison, the average stock in the Standard & Poor’s 500 stock index is now trading at about 13 times earnings.
Shuman also said the buyback would quiet the worries of investors who have feared that GE might make a large acquisition that would dilute the value of their shares.
Because of GE’s aggressive acquisition program during this decade, the company is constantly the subject of Wall Street takeover rumors. Welch noted, with amusement and exasperation, that GE officials continued to receive phone calls even after Friday’s announcement inquiring whether GE planned to purchase MCA Inc., the big entertainment company based in Universal City.
Analysts said GE’s decision to turn its attention from major acquisitions may reflect in part the run-up prices for many companies. It may also reflect the fact that GE will be busy attending to the acquisitions and joint ventures it has recently made.
Earlier this week, the company announced that it will spend $150 million to purchase a Hungarian light-bulb company. Earlier this year, it announced European joint ventures in the mobile communications, appliance and gas-turbine businesses. Last year, GE paid $2.3 billion to acquire Borg-Warner Chemical Co., based in Chicago.
GE said Friday that it will purchase the shares in the open market. It said credit-rating agencies have assured the company that the buyback will not hurt GE’s current triple-A debt rating.
MAJOR BUYBACKS The 10 largest individual U.S. corporate stock buyback programs.
Amount Year Company (billions) 1989 General Electric $10 1985 Atlantic Richfield $4 Santa Fe 1987 Southern Pacific $3.42 1987 Tenneco Corp. $3 1987 Exxon Corp. $2.57 1988 GTE Corp. $2.15 1987 Merck & Co. $2 1987 Ford $2 1988 IBM Corp. $2 E.I. du Pont 1989 de Nemours $1.97
Source: IDD Information Services.
