GE Continues to Focus on Its Balance Sheet. Its Latest Move Is Freezing UK Pensions.
General Electric continues to do repair work on its balance sheet. On Tuesday, the industrial giant said it has begun the process of freezing the company’s U.K. pension plans.
The U.K. pension freeze comes on the heels of many other pension actions taken by General Electric (ticker: GE) in recent months. The company transferred some obligations from its pension plans to an insurance company by purchasing an annuity. GE also froze U.S. plans about a year ago. The company also recently added more cash to improve pension plans’ funded status.
All that pension work is necessary because GE’s pension obligation is big. At the end of 2019, General Electric recorded roughly $94 billion in pension obligations, and $62 billion in assets set aside and invested for the benefit of current and future pensioners.
The U.K. pension freeze applies to about $14 billion in pension obligations.
Pension funding gaps can be debtlike for corporations, but they don’t often get talked about. That’s because they don’t always matter to stocks—most pension funding gaps are small relative to the size of an organization. That isn’t the case with GE, which has been around since the 19th century. The company has been promising pension obligations for its retirees for more than a century. And its $32 billion funding gap amounts to roughly 30% of its market capitalization.
As a result, swings in pension funding can affect GE stock. Full pension data isn’t updated regularly, though GE management said recently the performance of pension assets in 2020 was better than expected. Management could also talk about some of the company’s pension statistics when GE reports fourth-quarter earnings later in January. Otherwise, investors will get a look at the pensions and pension assets when the company files its annual report.
Pension freezes sound scary for pensioners, but existing retirees don’t see benefits cut. Current employees, essentially, stop earning more pension benefits and are instead transferred into a defined-contribution plan, like a 401(k).
“The proposed changes to our U.K. defined benefit pension offerings are difficult but necessary as we continue our work to accelerate GE’s transformation,” GE Chief Human Resources Officer Kevin Cox said in the news release. “ We are actively managing GE’s pension obligation by considering market trends and employee impact while thoughtfully balancing our company priority to solidify our financial position.”
General Electric wants to get its debt in the company’s industrial operations down to below 2.5 times Ebitda, short for earnings before interest, taxes, depreciation, and amortization. The company was on track to meet that goal in 2021 until the Covid-19 pandemic hit. Management has the same goal—it will just take longer to achieve.
The net-debt-to-Ebitda calculation doesn’t apply to the company’s finance arm. GE Capital’s balance sheet is more like a bank than an industrial and has different capital requirements.
GE stock closed 0.9% higher Tuesday . The S&P 500 and Dow Jones Industrial Average, for comparison, rose 0.8% and 0.4%, respectively.
The pension funding news is good for stockholders, and so is GE’s headway in its renewable-power division. Oppenheimer analyst Christopher Glynn wrote that GE was making money in onshore wind “at an improving rate.” He added that GE’s 12 megawatt Haliade-X offshore turbine “currently leads the industry in [electricity] output capacity….positioning GE ably in this fast-growth, emergent market.”
That’s another reason the stock rose Tuesday. Glynn rates GE shares Buy and has a $12 target price for the stock.
Onshore and offshore are, essentially, different markets with similar technologies. Offshore with is more expensive to set up than onshore wind projects.
Write to Al Root at [email protected]
