When interest rates are rising, companies that can’t grow usually see their stocks fall. When you evaluate the stocks you own, ask yourself this question; What is the company working on that has the potential to materially increase the stock price in the next three to five years in the face of rising interest rates? Here’s the answer I get when I listen to the CEOs of AT&T, General Electric, and Intel.
AT&T CEO Randall Stephenson just completed a large acquisition, paying $85 billion in cash and assuming $23 billion of debt for Time Warner. The acquisition is supposed to make AT&T competitive with Netflix which is a worthy goal capable of lifting the stock price materially if the plan succeeds. However, with a pre-merger market cap of about $223 billion, a $108 billion acquisition is a huge bet with significant downside. The arguments investment bankers put in their “fairness” opinions to justify the transaction almost never come to fruition. If this acquisition does not work out, AT&T shareholders could suffer big losses.
In 2014, when the Company bought DirecTV for $49 billion, the acquisition was justified as necessary to compete with Comcast’s triple play bundles which include phone, internet, and cable TV. Four years after the acquisition, I can say from personal experience that AT&T is still not competitive with Comcast.
Only one of my managers, Raymond Meyers, owns the stock, and it is only 0.75% of his portfolio. Another manager, Rahul Garg, used to own it for it’s dividend yield which is currently about 6%. But he sold it March of 2017 at $42. It’s at $33 now.
GE is down almost 50% in just the last 12 months. So what is CEO, John Flannery, working on? When I look at the plan management presented at their April 25 shareholders meeting one thing stands out; the word “customer” is not mentioned even once.
Usually, a plan to materially increase a company’s value starts with defining a group of customers who the company has a plan to serve better. GE’s plan is to sell off the “bad” parts of their business and invest the proceeds in the “good” parts. This would be a more compelling plan if there was some idea of what exactly the “good” parts of the business will use the additional capital for.
Without these details, I can’t help but think that GE investors would be better off if the company distributed the proceeds from the sales to shareholders rather than investing the money to finance unspecified improvements in the remaining businesses.
John Flannery only became CEO last August. He was not the CEO who got GE into the mess it is in. Nevertheless, I can’t see buying this stock until there is a better plan to turn things around. None of my managers have any real money in GE at this point.