GE is a Broken Stock

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My financial advisor said that recently. He’s right. Taking a close look at GE, one comes face to face with what has derailed many companies in the past three decades. Over the last seventy years (sadly, well within my lifetime), technology has exploded like a miniature version of the Big Bang that created our present universe. GE played a leadership role in that in a variety of fields ranging from light bulbs to appliances to large paper making machines to jet engines to turbines to power generation stations and so on.

But in the last thirty years that changed. The appliance division was sold, their finance division was caught up in the 2007 banking fraud, I have yet to see an LED light bulb with a GE logo. How did this happen?

Prior to the advent of tech upstarts like Microsoft, CEO’s earned a salary like the rest of us. Granted it was a healthy one and often augmented by bonuses. Stock options were rare if they existed at all. The goal was to strive for long-term company health, which meant substantial investment in research, development and workforce capability. Technological advances fueled growth and profitability.

Then, CEO’s (led in fact by one at GE) shifted the focus to stock performance. This required short term profits which meant emphasizing marketing existing products and cutting costs. Research and development dollars were slashed. By the time he left GE with an obscene retirement package, he had proudly eliminated over 100,000 jobs. Yes, he built stock value through multiple splits to an all-time high when he departed. But in the process, the company’s long-term potential was gutted. The stock now trades at 25% of that high and recently GE slashed its traditional high dividend.

Of course, GE is just one of many examples of corporations that are selling their soul for short term payback to investors. Many are not interested in company growth other than stock value. Otherwise, they would not be sitting on cash reserves in the trillions of dollars. Though most pay zero to 4% tax on their revenue, they want even that reduced by tax cuts. When the Bush administration cut corporate taxes, many used the windfall to buy back their own stock and drive the price up. That’s why the current tax bill is such a scam. There will be no long-term economic growth, only deficit growth and to combat that, punishing cuts in things we need. Anyone who advocates trickle down economics needs to refresh their understanding of the meaning of trickle. In reality, the trickle will be little more than a drip—with a torrent heading in the other direction.