It’s the last speaking gig of the year. Jim Bado and I did the nearly monthly GE Management Development Course (MDC) to close out the year. We had a typical MDC class. There were lots of questions and smart people in that group. It’s always a fast day at MDC. Jim did the Sunday night session and the advanced group on Monday while I did the basic course. As usual we did not get through all of the material. We really got slowed down on the balance sheet this time. We had lots of discussion surrounding leverage and why that is lower at GE Industrial when comparing other manufacturing businesses like Seamens. GE industrial doesn’t leverage with debt as much as competitors because of the connection to the GE capital business. Because GE Capital raises money and then loans it out like any financial institution it is critical that they keep the overall GE borrowing rate as low as possible. Because of their connection to the Capital, the GE industrial businesses do not use as much debt to finance their businesses.
The problem with low leverage is you get a lower return on equity for your investors since you are using less low cost debt to finance the business. So one argument that has been around for years is why not split GE capital out from the rest of GE. Certainly, that would make it easier for GE to add debt to its not-capital business. One the other hand, GE Industrial usually gets a multi-billion dollar dividend that improves its bottom line. That is often enough to offset the lower return due to less leverage. A second reason to stay together is due to the synergies of the two businesses.
Jim and I were able to see Phantom of the Opera on Broadway after the session. It was a good show after we tried to put on a good finance show. It was a great day for finance and also a great evening for a Broadway show. 🙂