General Electric Co (GE.N) plans to continue to shrink its finance arm, pulling back from consumer finance and reducing its real estate holdings, but Chairman and Chief Executive Jeff Immelt said on Wednesday he did not know how long the change would take.
The largest U.S. conglomerate expects the GE Capital unit's profit growth to be at a single-digit percentage rate in 2013, rather than in double digits as it lowers the amount the unit invests outside GE's core industrial operations.
"There's just so many things that are out of my control on that, that it's hard to make predictions," Immelt told the Electrical Products Group conference in Longboat Key, Florida. "I'd like that to take care of itself both by industrial (earnings) improving and by Capital shrinking, but it's just hard to predict the exact time period. But I think, in general, smaller's better."
While GE has been working to scale back the GE Capital unit it was still the largest of the company's six divisions in terms of revenue and profit in 2011. It contributed $45.7 billion of GE's total $147.3 billion in revenue last year.
The Fairfield, Connecticut-based company has had its hands full with GE Capital since the financial crisis, working first to make it a less-risky venture and then to convince investors and regulators that it had succeeded in doing that. One sign that it is succeeding came last week, when the Federal Reserve gave GE Capital the OK to resume returning a share of its profit to the parent company.
GE plans to use most of the $4.5 billion special dividend the Fed authorized to buy back the company's shares, Immelt said. He aims to reduce the company's shares outstanding to their level before the company raised $12 billion in new equity during the financial crisis.
"A lot of the dividends that we get over time from GE Capital that are surplus dividends are going to go to reducing the float," Immelt said.
CUTTING COMMERCIAL PAPER
GE Capital aims to use less short-term commercial paper debt to finance its operations, cutting the amount to about $25 billion, Immelt said. GE Capital had about $43 billion in outstanding commercial paper at the end of the first quarter, down from $105 billion in early 2008 before the financial crisis, when that market briefly locked up and threatened the financial stability of the company.
The world's biggest maker of jet engines and electric turbines will replace the capital it raised through the short-term debt vehicles with alternative sources, including taking deposits, Immelt said. Its pending acquisition of insurer MetLife Inc's (MET.N) online bank is intended to make the company less dependent on wholesale debt markets.
Immelt also suggested the company would be open to selling or spinning off its private-label credit business - a move it tried, unsuccessfully, in 2008. But he emphasized such a move would occur only when market conditions allow.
"Over the last three years since the crisis, we've told you what we were going to do and we've done it," Immelt said. "What we don't want to do is start getting out too far on things that aren't in our control."
GE shares were down 1.7 percent at $18.86 on the New York Stock Exchange on Wednesday afternoon, amid a broad slide in U.S. stocks.
EUROPE WEAK, INDIA SLOWS
The U.S. economy has been a little stronger than forecast, while Europe remains weak and India has "definitely slowed down," Immelt said.
"All of us planned for a volatile Europe, and that's more or less what we've gotten," he said, adding that the company's sales of spare parts for its jet engines had been weaker than expected in Europe this year, and could leave its overall aviation profit up by a single-digit, rather than double-digit, percentage.
GE expects to continue to generate more revenue through contracts to service the equipment it sells, Immelt said.
He forecast annual service revenue would grow to $60 billion by 2015 from $42 billion in 2011.
GE is working on developing new software that would allow it to charge more for its services - for instance, the company's aviation business is developing a system that would allow a plane en route to a maintenance facility to automatically send that facility a list of parts that would be needed to service its engines. That would allow the maintenance to be performed more quickly, returning the plane to flight, Immelt said.
(Reporting by Scott Malone in Boston; Editing by Gerald E. McCormick, Jeffrey Benkoe and Matthew Lewis)
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