Too many were paying attention to the men, too few to the company.
Too many were paying attention to the men, too few to the company.
D ividends tell the truth, though often with a lag.
So, it was interesting to hear General Electric CEO Larry Culp allow that GE is thinking about increasing General Electric’s dividend. A healthy increase, should it materialize, will flow from GE Aerospace, which after the spinoff of a GE Vernova, GE’s gas-power, grid, and wind-turbine business, will be the main GE.
“As a shareholder, I wish it were higher,” Culp said of the current dividend to Barron’s.
This line should hearten GE shareholders, especially since it was Culp who cut GE’s payout to a theatrical penny per quarter back in 2018, the same year General Electric was booted out of the Dow Jones Industrial Average after more than a century in the Index.
Not every company finds utility in paying dividends: Warren Buffett has always rejected dividends at Berkshire Hathaway. Still, dividends matter, and not just to GE. The discipline of making regular payments tethers companies to reality — that reality being their own underlying financial performance. Dividends have always comforted traditional shareholders. One such traditionalist was GE founder Thomas Edison, who said, after he sold his General Electric stake, that all he cared about was “as large dividends as possible from such stock as I hold.” Over the past century, dividends have accounted for about a third of return for S&P 500 stocks to investors. Standard & Poors has long maintained a “Dividend Aristocrats” Index of companies which increase their dividends every year across decades. Over the years, this index has shown that such companies bring higher returns.
And, as a spate of recent books about General Electric reveals, to track the dividend record of a company like GE reveals more than information about a single company. It reveals how very much our hero-and-villain style of covering business news obscures what’s really going on in markets — and, yes, capitalism.
It is precisely as a dividend provider that the innovative GE lived the first century of its existence, paying out substantial amounts of cash to shareholders, even as it moved from the light bulb to the first commercial power station to the X-ray, vacuum tube, nuclear power, lasers, and medical devices. In 1938, late in the Great Depression, GE cut its dividend to 30 cents from 40 cents a quarter, and after the war, management strove successfully to avoid a second cut. Even in the 1970s, a rough time for corporations, GE sustained both a dividend and a huge base of shareholders, as authors Thomas Gryta and Ted Mann note in their 2020 Lights Out.
What happened to General Electric in the 1980s, 1990s, and 2000s was captured in two words: “Jack Welch.” From the moment he became GE’s CEO in 1981, the same year an erstwhile GE employee, Ronald Reagan, moved into the White House.
The coincidence was fortuitous for Welch, for the Reagan presidency marked the beginning of a sustained stock-market boom. Tax cuts are good for stocks. It helped that Reagan and Congress lowered income-tax rates, which benefited the entire economy (including dividends). And from the beginning, Welch played proxy for the success of Reagan capitalism, shining so brightly that he became America’s most famous business executive. Any news from GE was covered as a kind of victory for Jack — and, it was said, for the “gales of creative destruction” described by conservative philosopher Joseph Schumpeter. When Welch laid off tens of thousands of employees at the company, the papers wrote about “Neutron Jack,” the point being that, like a neutron bomb, he took out the people but kept the infrastructure intact. In Winning, his own book, Welch codified the need to drop under-performers: “there is no sugar coating this — they have to go.” Welch made some bold acquisitions — acquiring companies GE had owned decades before, RCA and NBC, into whose office at Rockefeller Center Welch promptly moved.
Welch’s most memorable feat was teaching a manufacturing company to “make money from money,” as William Cohan puts it in the most perspicacious of the GE books, Power Failure. It was Welch who had the genius to note that industrial GE’s stellar credit rating, AAA, gave its financial teams a powerful market advantage over banks, which labored under lower ratings. “We borrowed money cheaper than anyone could,” as one GE executive, John Myers, told Cohan. Retaining stellar managers, Welch exploited that advantage to the max. In the process he transformed GE’s humble credit arm, which earned $67 million in 1977, into GE Capital, a powerhouse that earned $5.2 billion in the year 2000.
When Welch took over, the company was worth $14 billion, increasing to $600 billion two decades later, the most valuable company in the world. “To play with money was so much better than bending metal,” Welch, who had trained in his youth as an engineer, later commented. The Wall Street analysts whose expertise was in metal bending likewise were thrilled at this transformation, and suspended disbelief.
Playing with the money meant going on a buying spree of companies, some good, some less so, and returning above-market value to shareholders in stock prices and stock buybacks, the latter of which strengthens value per share by downsizing the denominator. And yes, there were also dividend increases.
Never mind that Welch was exploiting the accounting flexibility of a financial-services company, GE Capital, to cover up shortcomings in his manufacturing divisions, as Cohan details. Never mind that Welch was massaging his numbers, which bore a resemblance to the way in which Soviet leadership massaged agricultural productivity metrics to cover for their regime’s failures in the same period. Never mind that he was sending his attorneys to silence any reporter who was seriously delving into GE’s numbers — yes, there was one, Thomas O’Boyle of the Wall Street Journal. As quarter after quarter Welch met their own earnings estimates, analysts elevated Welch to the altitude of demigod. When the few critics on the left spoke up, that merely drove Welch’s fans to strengthen their defense. “Jack set the path. He saw the world. He was above the whole world,” David Zaslav of Warner Bros Discovery told the New York Times. “What he created at GE became the way companies now operate.” In addition to becoming source material for endless business-school curricula, Welch found himself glorified in thousands of articles, an average of eight thousand a year, according to the author David Gelles.
When it came time for departure, Welch ensured commentators would sustain their Great Man storyline by dragging out the selection process, finally settling with a compliant board on Jeffrey Immelt, an insider who had built up GE Medical Systems. “Welch’s Successor is Likely to Succeed,” read a typical headline. But Welch didn’t relinquish the limelight easily, dragging out the transition while he botched an acquisition of Honeywell, and then, later, once again calling attention to himself when the court proceedings for a messy second divorce brought to screens the details of his magnificent pension package (annual dividend payments alone amounting to $2.6 million). Immelt’s failings, and his inability to effectively restructure the “House That Jack Built” became the reporters’ next focus.
It was the wrong focus. Too many were paying attention to the men, too few to the company. The very moves that had made Welch such a star spelled dark days for his company, whoever succeeded him. Welch had clearly fiddled with numbers to make the company look stronger than it was. But more damaging was the reverie of the analysts and fans, who in their daze failed to spot the vulnerabilities in the company.
The greatest of these was GE Capital, which had become, in author Cohan’s term, an overleveraged “economic juggernaut.” James Grant, the rare commentator who looks beyond heroes and villains, pointed out in the run up to the crisis, GE’s credit rating was too high. What Welch had been doing was not merely capitalism in the traditional sense; it was also marketing and market hype. The marketing undermined the capitalism. And Welch’s successor, Immelt, continued the marketing trend, which in Immelt’s case meant going green. Henceforward, Immelt proclaimed, he would enforce a company-wide emphasis on raising environmental standards and producing green products, an undertaking he gave the goofy label of “Ecomagination.” In 2007, right before the financial crisis, GE increased its stock buybacks and thereby moving billions more to shareholders at the expense of what proved to be a vulnerable balance sheet.
Come 2008, GE’s clever market advantage over banks morphed overnight into disadvantage. After all, one of the first responses of the federal government to the crisis was to support banks. And GE was not a bank. It therefore lacked access to rescue funds that flowed from Washington and the Fed. The difference meant that suddenly GE bonds were no longer competitive. “By the way, I can’t sell my commercial paper,” CEO Immelt told Treasury Secretary Hank Paulson. Paulson and Sheila Bair of the Federal Deposit Insurance Corporation soon decided to support GE, but at tremendous cost: GE “traded off security for more regulation,” as Cohan notes, and found itself locked into the purgatory of classification as a SIFI, a Systemically Important Financial Institution. Dividend skeptic Warren Buffett also stepped up, buying $3 billion of a new preferred stock that came with a 10 percent dividend. “GE is the symbol of American business to the world,” Buffett told investors. But that symbol of American business was nowhere done with its cleanup. GE’s board ordered Immelt to cut the dividend, the first instance of such a cut since the Great Depression embarrassment.
After the crisis and the cut, after which shares hit an 18-year-low, GE fumbled further. Immelt paid out plenty of dividends, “more dividends during my tenure than during the previous 110 years of GE history combined,” as Immelt wrote carefully at the end of his tenure in Welch’s personal paper of record, Harvard Business Review. GE’s price to earnings ratio however plummeted to 17:1 from 40:1 in his last decade. Immelt was succeeded by John Flannery in 2017, who was quick to point out that GE’s dividend had exceeded cash flow for three years. Though Flannery bravely halved the dividend, he was merely accounting for the reality that, as Cohan put it “GE could no longer afford to pay nearly $10 billion a year in dividends.” He was quickly succeeded by the current CEO, Culp, of the penny-a-quarter dividend. Between 2016 and 2019 the company’s stock lost two-thirds of its value. Only after commencing the dismantlement of GE did the company’s parts begin to thrive.
Why did it all take that long to figure out? Because analysts and reporters took that long to abandon first the Cult of Jack, and then the cult of bashing Jack’s successors. But there was another reason: politics. Conservatives, and there were many in the marketplace, believed that to defend capitalism, they had to defend Mr. Capitalism. It is our own record of lazily going along with those who mistook market hype for true capitalism that makes defending capitalism such a tough job nowadays. Conceding this lesson is painful. But doing so will pay a dividend more useful than dollars for years to come.