Did General Electric Make The Best Move For Shareholders?
Joel Elconin is the co-host of Benzinga's #PreMarket Prep, a daily trading idea radio show.
General Electric Company (NYSE: GE) shares were trading sharply higher by $2.00 (7.5 percent) at $27.73 in Friday's session. The reason for one of the biggest up days in years is the announcement the company will be undergoing a significant restructuring; Included will be the sale of some existing assets coupled with a whopping additional $50 billion share buyback.
Immediately, the Street reacted favorably to the news as it soared to $28.23 during pre-market trading. That represents the highest level for the issue since it reached $27.94 in January 2014. It retreated and ended up opening at the low of the session at $27.00. Since then, it has rebounded to reach $28 before retreating to its current level.
Sale Of Assets
The sale of the assets is hard to question. They were purchased at a premium just before the financial crisis and now that they are back to break-even, it may be the right move to get rid of them and focus on the higher margin segments of the company.
However, the buyback may be questionable. Would the company have been better off by using the equivalent amount of cash to issue a $5.00 special dividend? The Street has been very receptive to special dividends as of late.
When Costco Wholesale Corporation issued its $5 special dividend back in January, the stock rallied from its February 2 close ($141) to $156.85, a rally of over 15 points in just a few days. Even after the dividend was dispersed, the issue never retreated much.
One might wonder if GE had declared a special dividend instead of the stock buyback, if the shares would be trading significantly higher than they were Friday morning.
With today's rally, it means GE is going to be buying back the shares at a significantly inflated price to where the issue was trading at Thursday. With Friday's announcement, GE is bidding against themselves as the Street is jumping ahead of its upcoming move in the marketplace.
International Business Machines Corp. has initiated huge buyback programs over the last few years and the issue declined from its all-time high ($215.90) to $149.52 in January and is now wallowing at the $160.00 level.
Time will tell if this was the best move for the company under the current circumstances. Whether finding new streams of revenue to replace the old ones or focusing on the profitable segments of the company is difficult to determine.
Given the historical financial events noted above, it is possible if the company had issued a special $5 dividend as opposed to the buyback, it may be changing hands $3 higher than its current price.
Listen to the first 10 minutes of the audio below for #PreMarket Prep's GE discussion.
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