A Blog by Jonathan Low


Apr 29, 2018

Old Tech: How GE's Underperformance Impacts Those Who Invested In It's Stock

The ripple effect across the economy. JL

Thomas Gryta reports in the Wall Street Journal:

The industrial giant is one of the most widely held U.S. stocks. The stock value lost by GE in the past 12 months is twice the amount that vanished when Enron Corp. collapsed in 2001—and more than the combined market capitalization erased by the bankruptcies of Lehman Brothers and General Motors during the financial crisis. More than 600,000 people have pensions from GE. "Investor confidence is a difficult thing to win back once it’s lost.”
Gary Zabroski started working for General Electric Co. in 1976, at an aviation factory in his hometown of Lynn, Mass. The job paid well, came with benefits and, for Mr. Zabroski, provided a career ladder for a man with a high- school education who started out cleaning toilets.
“You had a job for life if you had gotten in there,” said Mr. Zabroski, 61 years old. He rose to punch-press operator and retired in 2016, after working 40 years at the century-old plant, which roared to life during World War II and still churns out engines for jets and helicopters. He left GE with an annual pension of $85,000 and company stock valued at more than $280,000.
Retirement looked pretty good until GE shares collapsed. His shares are now worth about $110,000, prompting a late-life job hunt. “I never planned on retiring and having to go back to work,” said Mr. Zabroski, who has monthly mortgage payments and supports a partially disabled wife. “It’s kind of scary.” The rapid unraveling of GE has wiped out roughly $140 billion in stock-market wealth in the past year, not just at big Wall Street firms but among small investors. The industrial giant is one of the most widely held U.S. stocks.
By comparison, the stock value lost by GE in the past 12 months is twice the amount that vanished when Enron Corp. collapsed in 2001—and more than the combined market capitalization erased by the bankruptcies of Lehman Brothers and General Motors during the financial crisis. Longer term, GE’s market capitalization has fallen more than $460 billion since its 2000 peak.
GE’s recent losses haven’t been caused by scandal, catastrophic economic conditions or a market meltdown. They have arisen from badly timed investments, troubles in key markets and overly rosy financial projections that together have triggered a restructuring that could break apart the company.  
GE executives have said that most of the company’s businesses were doing well, despite problems of the past year, and that the company has enough cash to fund operations and the dividend. “I am keenly aware of the pain our stock performance and dividend cut have caused with investors, retirees and their families,” said John Flannery, GE’s chief executive. The company is focused on improving its performance and earning back trust, he said.
“This is a show-me moment,” Mr. Flannery said, “and the most impactful thing we can do is continue to make GE simpler and stronger. We will not let up until the job is done.”
On Friday, GE reported its latest quarterly results, which included rising profits in its aviation and health-care units and continued woes in its power unit. Mr. Flannery backed his 2018 profit targets and said the company was making progress on its turnaround efforts.

About 43% of GE shareholders are retail investors, people who own stock in their personal accounts, according to S&P Global Market Intelligence. That compares with 32% at Johnson & Johnson and 21% at Boeing Co.
Among those hard hit by GE stock losses have been company retirees, including former factory workers who took advantage of a stock-ownership plan to build their savings. For decades, the company has had a program that encourages employees to buy GE shares by offering to match 50% of worker contributions, which were taken directly from paychecks.
The fall in GE stock prices has put more of the financial burden of retirement on pensions. More than 600,000 people have pensions from GE, which is one of many employers struggling with those obligations. Pension plans sponsored by S&P Composite 1500 companies have an average funding level of 87% and a combined unfunded liability of $286 billion, according to Mercer. In the public sector, state and local governments have an aggregate unfunded liability of $1.4 trillion, according to the Pew Charitable Trusts.
With 71.4% of assets needed to cover its pension liabilities, GE is one of the worst funded large corporate pension plans in the U.S., according to an April report by consulting firm Milliman Inc. GE’s pension obligations, nearly $100 billion at the end of 2017, are underfunded by almost $30 billion.
“Their pension funded ratio is among the 10 lowest in our study, and that’s pretty significant given that they’re the fourth-largest company by asset size,” said Zorast Wadia, a consulting actuary at Milliman. The firm’s study included the 100 largest pension plans managed by publicly traded companies.
GE expects to borrow $6 billion this year to contribute to the plan. Rising interest rates, which increase the expected returns on plan assets, also will reduce the shortfall. In 2015, GE stopped supplemental health-care plans for many retirees and substituted a subsidy for private coverage. That change, plus a reduction in retiree life insurance, cut obligations by $3.3 billion.
Investors, many of them GE retirees, will gather for the annual shareholder meeting. It will be held inside one of GE’s newest facilities, a design center near Pittsburgh that uses a form of 3-D printing to make metal parts, including ones for GE jet engines.
The annual gatherings give investors a chance to air complaints, from CEO pay to environmental pollution. This year, retirees are expected to ask whether the company can make good on its promises.
“We never thought GE would do this to us,” said John Phelps, who worked more than 40 years at GE’s silicone plant in Waterford, N.Y., which was sold in 2006. “We believed they would do their best to take care of us.”
Mr. Phelps, a former union man who runs an advocacy group for GE retirees, said many fear for their pensions and other benefits.
The ability of the company to meet all of its financial obligations has been strained in recent years; its annual dividend payment of more than $8 billion was unsustainable because the industrial divisions didn’t grow enough to offset the loss of the financial-services business that for years helped earnings.
Companies from all kinds of industries have long tapped GE for executives because of its reputation for excellence.
For workers, a job at GE was a job for life. That changed in the 1980s when the company cut layers of its workforce during a period of austerity that earned former chief executive Jack Welch the nickname “Neutron Jack.”
With the rise of the global economy at the turn of the century, the company began shifting operations and jobs overseas. By the end of 2017, about a third of GE’s 313,000 employees were based in the U.S., compared with 60% two decades ago.
Ben Marruffo worked at GE’s Morrison, Ill., appliance controls plant for 42 years until his 2008 retirement. The facility, about 130 miles west of Chicago, opened in the late 1940s and closed in 2010. GE sold its home-appliance business to Chinese company Haier Group in 2016 for $5.6 billion.
Mr. Marruffo grew up a few miles from the plant and never moved far. He was one of eight children, and five of his brothers also worked at the GE plant. His father worked at a steel mill for 40 years, and Mr. Marruffo said he remembered his father coming home with holes burned in his clothes from the molten metal. His father had a pension but didn’t get to collect for long before he died. Mr. Marruffo, 71, started with GE as an apprentice, working in different engineering and manufacturing areas. Just like many business experts, he respected GE’s management. Mr. Marruffo accumulated GE stock through the company’s Savings and Security Plan. He figured the company was just about invincible, which made the fall in its stock price devastating. He sold some last year but still owns about 6,000 shares. He now regrets he didn’t sell more.
For years Mr. Marruffo didn’t pay much attention to the stock price, he said, but after watching half of his money evaporate, he checks every day. “I look at the stock market at the end of the day and wonder if it is has hit its bottom,” he said, “and how long it will take to recover what it has lost.”
He remains optimistic that Mr. Flannery can turn around GE’s fortunes. “You kind of hold your breath and hope there isn’t another shoe to drop,” he said.
GE stock has long been seen as a safe investment, with the good fortune of the 125-year-old company a reflection of the strength of the U.S. economy. Many people unconnected to GE kept the stock in their investment portfolios.
Jack Ennis, a retired New Jersey schoolteacher who is 63, began buying GE stock in 1980 when he started investing for his mother after his father died. He compared GE’s decline with such long-gone companies as RCA, Union Carbide and Allied Signal .
Mr. Ennis said he has seen GE go from “America’s trusted consumer lightbulb and appliance provider” to a “convoluted conglomerate heavily focused on finance and communications.” He blamed former chief executive Jeff Immelt, who retired last summer after 16 years at the helm, and the GE board. Including dividends, GE stock gained 8% over the Immelt years, while the S&P 500 rose 214%.
“Sadly, investor confidence is a difficult thing to win back once it’s lost,” Mr. Ennis said.
Jack Feigh, 69, traveled for different jobs at the company—California, Kansas City, Louisville—before retiring in 2007 from the appliance division in Salt Lake City.
His parents were bakers who owned a cake shop, and Mr. Feigh recalled how self-employment left them with little more than Social Security after they retired. He was determined to do better for his wife and three children, contributing the maximum amount from his weekly paycheck to buy GE stock. He was encouraged by co-workers doing the same. Older workers he knew retired with plenty of savings.
While he was working, Mr. Feigh would use his dividends to buy more GE shares. “At the time, I didn’t think you could beat that,” he said. “The opportunity to buy more and more stock.”
Mr. Feigh retired after more than 30 years at GE. When the company’s share price tumbled in the financial crisis, he lost almost $300,000 in value.
“Employees need to think very carefully about investing their own money beyond 10% in company stock,” said Corey Rosen, founder of the National Center for Employee Ownership, a nonprofit that works with companies. “If you are looking at retirement, then diversification is a good thing.”
In hindsight, Mr. Feigh agrees. But at the time of the financial crisis, he thought most stocks were getting battered so he might as well stick with GE. At the start of 2017, he had about $190,000 in GE stock, which is now worth about $70,000.
He consulted with a financial planner about selling what was left, but was advised to hold the stock. It was bound to go up, he said the planner told him. Mr. Feigh now doubts that it will, at least in his lifetime.
“I thought I was doing it right, but apparently I wasn’t,” he said. He hasn’t talked to his family much about the losses, he said, other than to vent that his “once-proud retirement was going up in smoke.”
Mr. Feigh depends on his pension and Social Security checks. He uses the GE dividend to pay his car insurance. He and his wife have put planned vacations on hold, including dreams of a cruise in Europe and a trip to Australia.
“The way GE’s stock is going,” he said, “we might lose it all.”
Dow Jones Industrials member companies


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