GE Shows Why Stock Buybacks Aren’t Always as Good as Dividends

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News that

General Electric

might begin buying back stock again is more than a sign the company has repaired its balance sheet. It is also a reminder that dividends and stock buybacks are two different things.

The two are similar in that they both return a company’s cash flow to shareholders. But with dividends, cash goes into investors’ pockets, while buybacks reduce a company’s share count, ideally increasing the value of each share.

Buybacks have their advantages. They are supposed to be more “capital efficient” than dividends because they are taxed when investors receive them, while taxes on capital gains—the potential result of buybacks—are paid when a stock is sold. Other tax considerations also slightly favor buybacks, according to accounting expert Robert Willens.

But a bird-in-the-hand argument favors dividends. GE’s (ticker: GE) example shows why.

The conglomerate said on Tuesday that its board authorized spending $3 billion on buybacks. That gives the company the ability to repurchases shares if management chooses.

GE has been out of the buyback game for a while, for good reason. A legacy of poorly timed acquisitions and stock buybacks left the company with too much debt, so it had to use the cash it generated to pay that down instead of sending it back to shareholders.

GE used to be a big buyer of its own stock. Between 2012 and 2017, the company spent roughly $32 billion to repurchase its shares, net of any cash coming in from stock issuance. GE’s share count dropped by roughly 235 million shares over that span.

GE was purchasing a lot of stock back when shares were north of $230. Calculations aren’t perfect, or easy, but GE’s average purchase price was likely well above $200 a share. GE shares are at about $93 today, so the company clearly overpaid for its own stock.

The company had no comment on the past repurchases. No GE figures on its average purchase price were immediately available.

All that money was going out the door, or into the stock, even though the company had an enormous burden of debt. Coming up with an exact number is difficult because much of it was linked to GE Capital, the industrial businesses’ vast finance arm, which borrowed money to lend to customers to buy its turbines, engines, and other products, among other operations.

Starting around 2018, new management at GE decided to tackle that debt load. Over the past three years, the company has paid back more than $85 billion in debt, selling assets to fund the process. In theory, GE might still have its Biopharma business or its aircraft-leasing business, both sold recently, if it still had the billion it spent on share repurchases.

Now, GE’s balance sheet is in much better shape. That’s why management can think about buying stock.

Today, GE has roughly $25 billion in net debt, which is essentially total debt less cash. It is expected to produced earnings before interest, taxes, depreciation, and amortization, of about $10 billion by 2023, so net debt is 2.5 times Ebitda. Industrial companies in the

S&P 500
operate with an average ratio of about 2 times today.

GE’s dividend, meanwhile, has withered as management sought to preserve cash and pay down debt. The company once paid out $1.92 a share per quarter, adjusting for its recent reverse stock split. Now it pays out 8 cents a share.

In the end, buybacks ended up costing GE shareholders more than they cost the company. That isn’t the way it’s supposed to work out.

Write to Al Root at [email protected]