Like many others that have earned their reputations and living in the investment community over the past couple of generations, I too was shocked to hear news yesterday that General Electric (GE), once regarded as the world most important industrial company was, after being a constituent in the index for more than a century, about to be removed from the Dow Jones Industrial Average.
While it is true that the Dow Jones Industrial Index, a price weighted average of 30 significant stocks traded on the New York Stock , is of somewhat less importance today than it used to be, from a symbolic point of view it remains the most frequently quoted and used. In the real world I suppose that being quoted on the NASDAQ index remains the most trusted and most if not all US conglomerates and others are to be found on this index. The Standard & Poor’s 500 index and that is best known as the S&P 500 is also considered hugely important being that it covers 500 of the largest companies that have stock listed on either the NASDAQ or Dow Jones Industrial Index.
General Electric is apparently to be replaced by the owner of UK retail chain Boots the Chemist, Messrs Walgreens Boots Alliance, a move that is said to represent the declining fortunes of GE (yes, GE shares have declined by over 50% over the past year) and also a changing US economy (one that presumably reflects an economy that has been importing more and manufacturing less not to mention an economy becoming more reliant of consumer spending, retail and financial services).
Supporters of throwing GE out of the Dow Jones Industrial Index cite the change as making the index more representative of the US economy. Perhaps, but it may well make it more volatile as well. Sure, markets and investors, particularly the likes of inter-dealer brokers, thrive on market volatility but companies and consumers do not.
For a time back in the 1990’s General Electric was one of five US companies that I was required to follow as an analyst – the others being Boeing, Lockheed Martin, Raytheon and the then Sikorsky helicopter owner (this subsidiary now owned by Lockheed Martin) United Technologies. In doing so in respect of GE when we were both working for the US brokerage Prudential Bache, I worked closely with my New York based colleague Nick Heymann. To say that Heymann was anything other than a fan of GE would be an understatement and even today, now working at William Blair, Heymann anticipates GE shares to rise by 50% this year after crashing down 52% over the past twelve months.
We will see but he has a point when reminding that although GE has large unfunded pension obligations there are major benefit to the company from rising interest rates meaning that for every quarter-point increase in the yield of 10-year U.S. Treasury notes reduces the pension deficit by $2.2B. All in all, caution probably advised here but like many other large industrial based companies worldwide GE is now working through a range of different problems through what it has called a ‘reset process’ which to you and me means simplification. The hope is that this will significantly improve cash flow.
I had the pleasure of meeting Jack Welch when he was CEO in the 1990’s and also his successor, Jeffrey Immelt who worked hard to build on the Welch legacy. Die-hards will recall that it was Jack Welch had introduced and forced through ‘Six Sigma’ processes into and across all elements of GE culture and operation and that he was famous for his retorts such as ‘change before you have to’ and ‘Control your own destiny or someone else will’ and finally here, ‘an organisation’s ability to learn and translate that learning into action rapidly is the ultimate competitive”. One is bound to wonder what the great man thinks of all this now!
Now, for those who when I am writing on a specific company like me to include history the story of General Electric begins in 1876 when Thomas Alva Edison opened a laboratory in Menlo Park, New Jersey, in order to explore the possibilities of the dynamo and other electrical devices that he had seen in the Exposition. Out of that laboratory was to come perhaps the greatest invention of the age – a successful incandescent electric lamp.
By 1890, Edison established the Edison General Electric Company bringing his various businesses together. At the time the major competitor to Edison was the Thomson-Houston Company and which had by then became a dominant electrical innovation company through a series of mergers led by Charles A. Coffin. As both Edison and Thomson-Houston businesses expanded it became increasingly difficult for either company to produce complete electrical installations relying solely on their own patents and technologies. So, in 1892 they merged to form the General Electric Company.
Several of Edison’s early business offerings are still part of GE today. This includes lighting, transportation, industrial products, power transmission, and medical equipment. The first GE Appliances electric fans were produced at the Ft. Wayne electric works as early as the 1890s, while a full line of heating and cooking devices were developed in 1907.
Through the years that followed General Electric either led or mirrored electric power development in the form of power stations, electric locomotion of trains, development of X-ray equipment, voice radio. Electric home appliances, vacuum tubes, televisions, moldable plastic and silicone compounds, Commercial Jet engines, nuclear power equipment, laser lights, medical devices including CT scanners, built a massive financial services operation a acquired companies such as RCA, NBC, Alstom to name but a few. GE also has large interests here in the UK such as aero-engine maintenance operations in Wales, renewable energy, transportation, power supply, healthcare, digital and many more. Big acquisitions have included the aerospace business of Smiths Industries,
Interestingly the GE Aircraft Engines story, perhaps the most significant part of the operation that I needed to have knowledge of, began in 1917 when the U.S. government began its search for a company to develop the first airplane engine “booster” for the fledgling U.S. aviation industry. The rest is history and although Rolls-Royce are the leaders in large wide-bodied gas turbine aero engine technology and market share, GE remains the largest global producer of commercial aero engines.
GE makes for a riveting story and one that despite issues is far from reaching its end. Over the years it has generally been one of constant rise but over the past twenty years it has faltered. Even so, GE leaders have over the years built a diverse portfolio of leading businesses, a stream of powerful company-wide initiatives that have driven growth and reduced cost and also, they have never been frightened to sell parts of the portfolio.
Importantly GE has developed a set of common values that allow it to face any environment with confidence – a situation that despite being thrown out of the Dow Jones Industrial Average, I believe that in slimmed down simplified form, it still will.
CHW (London – 21st June 2018)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785