GE's Earnings Report & Immelt's Equity Purchases

My last post on GE was just last week. The occasion was the release of CEO Jeff Immelt's 2007 compensation. For details, see my post. suffice to say, I found his latest year's compensation pretty much unrelated to GE's posting another year of total returns which under-performed the S&P500 Index.

This morning on CNBC, a network owned by GE, passages from Immelt's letter to shareholders were shown. Immelt is refusing to consider selling the entertainment sector of the conglomerate, while once again attempting to focus attention on his 'Ecoimagination' unit.

It was heartening to see one of the network's co-anchors clearly note that GE has under-performed the index during Immelt's entire reign, with a price chart to support the fact.

Immelt is to appear on CNBC tomorrow morning in an 'interview,' if you can call it that when the co-anchors interview the guy who can fire them.

But perhaps Immelt's most daring ploy this year is his announcement that he has bought $4MM of GE shares on the open market with his 'own' money, i.e., not via granted options.

Mike Holland, a guest host on CNBC's morning program today, noted the share purchase and touted the stock to viewers.

Here's my take on Immelt's GE share purchase move.

The first Yahoo-sourced chart nearby depicts the price of GE stock and the S&P500 for the past twelve-month period. It's clear that both have fallen sharply since the mid-2007 credit market problems. The index has fallen about 15% in that period, while GE has fallen in the vicinity of 22%.

Thus, per Mike Holland's comment this morning on CNBC, it's a buyer's market in the index and probably GE for investors with money and patience. Jeff Immelt has the first, thanks to GE shareholders, and probably the second, again, thanks to shovelsful of cash and options compensation over the past seven-plus years.

Since the S&P rises in roughly 70% of months, and it just fell nearly 15% in eight months, it's a safe bet that it will be rising by the end of this year.

If Immelt bought $4MM of S&P Index fund shares, it would be a signal to investors, especially in GE, that even Immelt thought the index would be, as usual, out-performing Immelt's company this year.

By purchasing $4MM of GE stock, Immelt will likely get a return similar to, but lower than that of the index over a like period. The nearby Yahoo-sourced 5-year price chart for GE and the S&P500 Index demonstrates how closely together the two tend to move.

Even if Immelt gives up some return on his $4MM by buying the lower expected return equity, he probably goes a long way toward saving his job, which is worth more like something north of $15MM/ year. If GE under-performed the index by 5 percentage points in the next twelve months, Immelt would only lose some $200K, but reap a public relations windfall that could easily stave off calls for his scalp.

I don't think Immelt is actually investing in GE as a vote of confidence in his management or the company's promising near-term opportunities and potential for a unique total return.

Rather, I think Immelt is simply making a very public bet on the direction of US equity markets for the remainder of this year, and probably next. After such a significant drop in price level of the S&P, there are several stocks with betas near 1 that would be relatively safe buys for a wealthy investor. GE's beta is .72, according to Yahoo.

I wrote in that linked post last week,

"As I have written in previous posts, when a CEO has been paid north of $10MM in cash, does anyone think he really cares what happens to the company's stock price anymore? Added to Immelt's prior $23MM of cash compensation, GE has now paid him over $30MM in just six years."

Immelt certainly has the money and, thus, the investing horizon to buy GE shares now and bet that, due to the broader market's recovery in the next twelve months, GE's share price will rise with the market, regardless of the company's actual operating performance.

I'd never say Immelt is not a smart man. In fact, he's extremely clever- for his own welfare. Too bad he hasn't been as smart or clever for his shareholders' benefit for the past six and a half years.