Buybacks gone amok

How Jeff Immelt destroyed Jack Welch's legacy

For a short period in the early 1980’s I was a Vice President of GE Canada, a subsidiary of GE. Jack Welch was CEO and he built GE to become the largest and most profitable company on Earth. He chose Jeff Immelt as his successor.

Jack regretted that choice. The New York Times published an article on Immelt presiding over the downfall of GE. Home Depot founder and one-time director of GE Ken Langone claimed Immelt destroyed GE. He was right.

Immelt’s leadership style was authoritarian with subordinates expected to support his every idea regardless of its merits. While Welch welcomed debate and even criticism from subordinates, Immelt would not stand to be challenged.

As GE deteriorated under Immelt’s leadership, he blamed others including Welch for the problems he faced. GE earned $1.41 a share in 2001, the year Immelt took over as CEO. Eleven years later, in 2012, GE earned $1.29 a share. A decade of Immelt management advanced no one’s interest except Immelt’s.

Among other things, Immelt turned to stock buybacks in a vain effort to build earnings per share, spending $2 billion on share repurchases in 2014, another $24 billion in 2015, and a further $22 billion in 2016. These buybacks reduced GE shares outstanding to 8.7 million, a reduction of about 9.2 million from when he took office. The effective cost of the buybacks (net of shares issued for other reasons) was about $52 per GE share.

As GE came under pressure from activist investor Nelson Peltz, Immelt committed to GE earning $2.00 a share in 2017, Immelt’s last year in office. Among other things, Peltz put pressure on Immelt to buy back shares and cut costs. GE lost $6.2 billion in 2017 and the share price tanked 44%.

Today, what was once GE is now reduced to GE Aerospace following the divestiture of GE Capital, GE’s Health care related businesses, GE’s consumer businesses and GE’s energy related businesses. With a market capitalization of only $180 billion today, GE Aerospace comprises the remnants of what was at the time Immelt became CEO the world’s most valuable company with a market capitalization of over $500 billion, What is left of GE bears little resemblance to the house that Jack built.

GE’s story is an example of the temptation of management to use share repurchases to prop up poor performance and manage reported earnings per share. It is a disease, often encouraged by shareholders bent on short term trades who think a spike in the share price will allow them to find a greater fool and sell their holdings at a gain leaving the greater fool holding the bag.

Investment success follows finding well-managed companies with management strong enough to avoid the demands of activist shareholders and the competence to expand their value added operations at a pace more or less in line with global economic growth while paying out dividends from the cash flow not needed to support that growth. It worked for Warren Buffett and it will work for you.