GE has the largest pension shortfall in the S&P 500. It’s a $31 Billion Balance Sheet Hole That Keeps Growing.
At $31 billion, GE’s pension shortfall is the biggest among S&P 500 companies and 50 percent greater than any other corporation in the U.S. It’s a deficit that has swelled in recent years as Immelt spent more than $45 billion on share buybacks to win over Wall Street and pacify activists like Nelson Peltz.
In the last two years, GE spent little more than $2 billion on total pension contributions, which hasn’t been nearly enough to keep the overall shortfall from widening. (The company also curtailed capital investments.) At the end of last year, its pension had $94 billion in obligations but only $63 billion in assets — a funding ratio of 67 percent.
In addition to the “anemic” free cash flow from its industrial businesses, GE’s pension hole and its indebtedness helped subtract roughly $8 a share from its equity value, based on a sum-of-the-parts analysis by Cowen & Co. That’s equal to $70 billion in market capitalization. To put it another way, the discount amounts to eight years of per-share earnings based on 2016 results.
The company has the largest projected benefit obligation of any S&P 500 member and among the top 10, no one has a lower funding ratio.
Because interest rates are still relatively low, it’s possible for GE to borrow money it needs to cover its shortfall. Verizon Communications Inc. and FedEx Corp. sold bonds this year to do just that.
Default Danger
Nobody is suggesting that GE is in imminent danger of defaulting on its pension obligations and many analysts say the company still has years to address the bulk of its shortfall. What’s more, a rising rate environment helps GE winnow its pension deficit by boosting its expected return.
And the longer its pension remains underfunded, the costlier it becomes. The Pension Benefit Guaranty Corp., a government agency that acts as a backstop when plans fail, has more than tripled its rates for companies with funding deficits, and they’re set to rise even more in the next two years.
Dividend Yield, Market Cap
I fail to see how GE can afford to keep paying a 3+% dividend. But the moment GE lowers the dividend, its share price will likely crater.
Pension Bomb
Time Bomb Talking Points
- Current Liabilities: $94 Billion.
- Current Assets: $63 billion.
- Shortfall: $31 Billion.
- Obligations: $47 billion in pension benefits to its retired employees and their beneficiaries over the next 10 years.
- Pension Trust owns 32.9 million GE shares at the end of 2016.
- Assumptions: 7.5 percent return.
- GE’s non-pension debt: $130 billion.
GE needs to come up with nearly $5 billion a year for 10 years just to meet pension obligations. That assumes an annualized rate of return of 7.5% a year.
Warning bells are flashing. Returns are far more likely to be zero or negative than anything approaching 7.5%.
The danger of default is real. I suggest likely, even though default isn’t “imminent”.
Mike “Mish” Shedlock
share buy back should be illegal – even more so when there is a pensio fund deficit, in which case the shareholders and the company are asset stripping the pension fund.
employees are producing the profit that enables the possibilty of share buy backs – the pension fund also buying shares in GE is an horrific conflict of interest.
this stinks as much as the recent failure of the canadian mortgage lender where the chairman of the mortgage lender took pension funds to support a bank run by depositors.
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This is par for the course with public companies. Playing with pension contributions is one way they “beat the number” every quarter by exactly one penny.
Management got their bonuses, and they won’t be paying any back when things blow up. Shareholders who don’t look at balance sheets are in for a royal screwing.
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“Current Liabilities: $94 Billion.
Current Assets: $63 billion.
Shortfall: $31 Billion.
Obligations: $47 billion in pension benefits to its retired employees and their beneficiaries over the next 10 years.
Pension Trust owns 32.9 million GE shares at the end of 2016.
Assumptions: 7.5 percent return.
GE’s non-pension debt: $130 billion.”
Don’t we also need to know how much GE and employees are adding the pension fund annually? And a 7.5% return isn’t implausible. Chicago has much worse problems than GE.
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I’m pretty sure this is why the fed is raising rates despite weak growth. Pensions and retirees have been on the short end of the stick for too long.
Look at Puerto Rico, Illinois, many other states and many older companies like GE. Their finances are a mess. They depend on higher fixed income returns. The fed has to juggle lots of flaming swords and not get burned too badly.
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A .25 point here and there won’t put a dent in the problem.
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I love “return on investment equals X%”, which always seems to be a lie. So the assumed return for GE’s pension fund is 7.5%. Really, how so? Is it all invested in GE stock? The dividend payout that high is it? Or is it the anticipated price appreciation? Oh wait, one has to sell the stock to realize that profit. so the great Jack Welch made his name cutting costs and quality to the bone before becoming CEO. Then he became in reality, a commercial real estate agent buying and selling companies, sometimes at a profit, sometimes at a loss. His best average profit for the company during his tenure was 10 to 15 percent, or average. Imelt, well, what’s to say. After Jack pretty much ruined the company it no longer was worth keeping an eye on. Imelt confirmed that opinion. I guess the lesson is that if you can’t buy and sell companies to boost your numbers, then hustle the stock market buying and selling your own stock. But please, 7.5% return on investment for your pension fund? I get that from my shares of Royal Dutch Shell, not the crummy 3% GE gives. I hope the retirees have a lot of rope handy.
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Royal Dutch Shell will not be paying their current dividend (or maybe ANY at all) for much longer if the oil price doesn’t rise substantially sometime soon.
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very true, but the world runs on energy and in particular oil, coal, and natural gas. The dividend may go down and so the price, but the upside is far better that GE. In the long run, what does GE have to offer for the investor versus RDS? I’ll take my chances with Shell
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True, Shell is narrowing money to pay its dividend which is never sustainable. I thought that there were laws against accounting fraud?
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The “move forward to the 21st century” Law first passed in 2010 allows pension funds to use an average of interest over the last 25 years to calculate future returns. Previously 2 year average had been used.
Pensioners should get a letter each year explaining the law and it’s effects. The law gives pension funds the cover to contribute little or nothing into the funds. Look it up!
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Its the american way. Liabilities far exceed assets. System is essentially short USD on flow basis perpetually. Liabilities are due. Neg cash flow in savings/ pension systems to rise in trend. Fallacy of asset bubble is that liabilities still rose at a much faster rate. Fighting excess leverage with more leverage!
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Don’t worry. Obama’s job czar (Jeff Immelt) has his pension extremely well funded
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Jack Welch, Bernie Madoff.
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And when the go belly up they claim it on the unions. Till then not much funding for their pensions. GE guys almost retired: take the lump sum and run quickly.
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GE doesn’t offer lump sum on pensions. I just tried before April 1 when I hit 60 and started receiving checks. They ain’t stupid, everyone would cash out, well maybe not. I sure would have.
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Barack Obama’s pension is fully funded, he won’t have to worry like the people who voted for him.
Jeff Immelt, Obama’s job czar, just retired from GE, and his pension is fully funded.
All the members of Congress have fully funded pensions, even if they serve just two years. Anthony Weiner didn’t even serve a full term, and his pension is fully funded.
You, the people who constantly vote for bigger and bigger government? Well, you deserve the pension you voted for — you deserve nothing. You deserve to suffer, just like the people who voted Hugo Chavez and Maduro into office in Venezuela.
Same dumb voting, same outcome!!!
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Big Empire is Big Government.
There is so much waxing nostalgic over WW2. The U.S. Empire is not so different than the Roman Empire was. The U.S. took over for the British Empire and the Chinese are waiting in the wings to take over for a faltering U.S. Empire.
Same dumb voting applies to both political parties. They are both gaming us. Bush gave us Medicare, Part D and promoted the Ownership Society housing bubble. Both McCain and Obama were for TARP. Not Bush, Obama or Trump have criminally prosecuted the bankers.
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The stupid pathetic voting ciphers get emotional rewards by living their lives vicariously through the parties and candidates they support.
Like with sports teams but with deadly consequences.
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So who is guilty of FRAUD here?
The GE board of directors for failing to properly fund the GE Pension Trust?
The directors of the GE Pension Trust for holding 32.9 million GE shares which pay only 3.34% while assuming a 7.5% return on assets?
The bankers who lend money to firms like GE to cover Pension Shortfalls who lend because they SELL these LOANS and pass the risk on to the buyers of the LOANS?
Since the Pension Benefit Guaranty Corp. is an agency of the U.S. Government and is raising the rates it charges to GUARANTY pensions, thus admitting that it knows there is FRAUD yet our Attorney General is not prosecuting any of these guilty parties is he/she guilty?
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How about CNBC or for that matter, NBC? Doesn’t General Electric own them? They can be useful idiots in the commission of fraud.
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Comcast owns NBC.
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Everyone is “at fault.” Including those dumb enough to believe in a “system” of “leaders” somehow taking care of them, just because they said so on TV or in some sales prospectus.
Of course, everyone being at fault, resolves to “noone is at fault” Running around trying to find who’s “at fault” and should be “punished” by Massa, is exactly why the whole once-pretended-to-be-at-least-decent country is no longer an improvement over even ISIStan or Chavezstan.
Use Gold as currency. Then each worker can put aside gold every month, pretty much secure in the knowledge that it won’t be inflated away. No need to worry about what some idiot “estimates” “pension fund returns” will be. Then you have a secure pension. You, or whomever, can nuke the whole bloody country, and your pension is still secure, since Mexicans will trade you stuff for Gold, as well. No more childlike dependence on a gaggle of expendable less-than-zeros running around screeching “he’s at fault, he did it. no, daddy, it was him who did it first…” pettiness. You have your gold, and your guns. You’re good to go. The idiots can go eff themselves, jump off a cliff and die, as they have no impact on your pension, nor life, anyway.
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as much as you dislike war as do i, one has to admit it creates demand and money-for awhile. hand writing on the wall. but I don’t want to make money off of death.
lets kill others so we can pay off our promises.
just awful time to live.
trying to inject some compassion and thought
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Don’t worry pensioners. Next downturn the Fed will buy your impaired credit and sagging equity along with many other falling assets. This printed money will enter the economy at the pension draw down rate over several decades. The retired boomers will be taken care of once again because our demographic bulge that defines us also controls our politicians. It’s the young who should be rioting but are too innocent to see they are screwed.
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“be taken care of”? Not a chance. They’re going to starve like the rest of us. You don’t seem to understand what’s coming.
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What is coming is self preservation, same as it ever has been. The only difference is that for decades now self preservation was about leaching more benefits from government entitlements, infinite debt and massive trade deficits to acquire cheap imports, but soon it will revert to the brutal base. It won’t be pretty. Never has been.
We have become a society of dependency and as such are witnessing the hollowing out of our economy and moral fiber. Once our technology has eliminated the elites dependency upon us for their goods and services, our services will no longer be required. We will be left fighting for our survival amongst ourselves.
The technological advances we have become so enamored with will be the property of the elites and their generosity will be limited while the debt they have incurred to develop will become ours. We have succumbed to the disinformation coming from our government and industries, the constant affirmations of our glorious “productivity” that is almost completely the result of technology that WE do not own. How can we claim productivity that is totally based upon tools we do not own? We are fooling ourselves. We have relegated ourselves to disposable depreciable assets.
And in the end, the unending desire to save the planet “we” will become “the problem” and “nature” will be allowed to take its toll.
Nothing survives without purpose….nothing. The day we come to believe we are indispensable and entitled to ANYTHING that we can not earn is the day of our demise from this planet. Even criminals understand this. Those standing around with their hands out demanding what they believe they are entitled to will not make it. Pensions will fall into this category. Promises made will not be kept because there is no way to make them do it.
We are on our own.
We always have been.
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Your statement below gets to the point but think of the consequences so long as the voting system stays the same. The outcome is a shift to socialism through the ballot box.
Unintended consequence is a shift to the left as the unneeded grow in proportion to the total. If the elites don’t want that it will be a case of changing the voting system or removing the franchise altogether or reducing the population.
“Once our technology has eliminated the elites dependency upon us for their goods and services, our services will no longer be required. We will be left fighting for our survival amongst ourselves.”
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Socialism IS dependency and dependency grants power to the providers. The dependents will not turn out those providing, no matter how meager those distributions might be. The greed for power will justify all kinds of horrors, but the thing that assures our demise is their lack of dependency on us. Currenty the dependents will keep them in power long enough for them to position themselves with all the assets and technology to get along quite well without us.
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The shift to socialism via the ballot box was complete by the 1960’s. You must have either slept through it or bought into the propaganda. In any event, it was a 50+ year ride and it’s going to die but it will not go quietly. Be prepared to work because all your other assets will be confiscated.
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Default is definitely imminent.
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I think it will all work out fine. THey just need to put everything in the Argentinian 100 year bonds yielding 8.25%
What could possibly go wrong?
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Frankly all corporations are on a hiding to nothing regarding pensions. There’s no way the growth of pension funds can keep up with the obligations now that economies are almost all in decline. Western economies peaked back at the time of the Moon shot, coincidentally about the same time as Nixon abandoned the gold standard, but all linked i’m sure. Since then we have lived on credit, and that cannot endure forever.
The solution is that the Federal government has to guarantee all pensions. It is the ONLY organisation which can do so, as it is monetary sovereign. It wouldn’t be inflationary as pension money gets spend directly into the economy. Forget the politics, its straight out a government duty.
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I suppose once a government makes their population all dependents, then they “owe” it to them to consume every citizen that has resisted, who has actually saved and prepared for the inevitables. Lets all buy a big home, lots of nice cars and build excellent expectations for our retirement. We EARNED IT, right? We know this because they promised it to us. And we KNOW they have to make good on their promises, right? Government backing all pensions will effectively make government the owner of all corporations, owners of everything and everybody….because the “owe” us. It’s their duty. Odd how I grew up thing THEY were US. I guess we owe it to ourselves?
Well, at least we know we are getting what we deserve…..
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Watch out for the waterfall decline. It is a part of every cycle.
The linear idea is one works one’s adult life and there is a pot of coins waiting at the other end. Problem is that cycles are not linear.
Economic depressions are when things fall apart. We were told that the Dow could never crash again, like in 1929. In 1987, the Dow crashed a record 22% in one day. We were told that real estate has never nationally gone down on a yearly basis since the Great Depression. Then it did.
Glass Steagall was created so what happened in 1929, could never happen again. They dismantled Glass Steagall, so it could.
Effectively, the 1920’s have repeated and the 1930’s are repeating and the 1940’s- WW2 are waiting in the wings.
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The way you get rich is selling nothing for something….a bubble driven by speculation in something previously relatively low in value that is ramped up. Everyone knows what’s going on, they know it’s a ponzi,but are convinced they can get out before it busts. Only those that fail cry foul.
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ZIRP is making corporate pensions extinct. City/state pensions will be next.
Its impossible to fund pensions with negative real interest rates and a 2% dividend yield on the S&P. The average 401k isn’t doing any better. A gold standard may be the only hope for future retirees. Bankers are confiscating people’s future.
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Inflation is the drug of stimulus that incentivise spending and disincentivizes saving.
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Printing is confiscation of people’s goods (including retirement savings) by bankers.
Bank models and theories are total nonsense. They are mostly just excuses dreamed up by thousands of economists working for the bank to rationalize bankers taking things from people. Economists at universities soon learn what “result” is expected if they want additional research grants from bankers. Much of economic “research” has devolved into people trying to figure out how to put confiscated goods (research grants) in their pockets.
Printing is confiscation of people’s goods. No way around that central fact.
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It’s possible it will encourage the rise of the Left promising to wave a magic wand.
The Right will look outside the borders for a reason to blame, the Left will confiscate from those inside the borders.
Choose war or confiscation. Both will cost tax $.
Both Left and Right will debase the currency as the end outcome.
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Yellen is tightening. Purchasing power is coming to Joe Sixpack’s household. Joe has never seen it before, but he’s heard talk of it from his grandpa.
Like a wet dish rag over the kitchen sink, excessive malinvested enterprises will be wrung out of the US economy restoring pricing power to the solvent. Growth can then take place, especially if Trump can corral some of the runaway regulatory madness the solvent class currently faces.
It will soon be worthwhile to have a job once you can actually purchase stuff, not with borrowed money, but with your newly found purchasing power. Amazing. Money will have value and the productivity of Joe’s work will be an expression of his paycheck, not some egghead economist’s theory.
Rates must rise for the good they can bring, not so “the Fed can cut them later”. Confiscation by bankers won’t be stopped, but curtailed somewhat. Everyday life will improve, cycles restored.
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Boy, are you an optimist.
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What planet do you live on? Whatever Joe Sixpack is gaining from price deflation he’s losing via tax increases.
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GE has been a weak company with politically savey managers for over 20 years. The obsession to make ones numbers drives many pathological decision making among middle managers at GE.
Its a supertanker for sure, able to coast for a very very long time. Plus it’s businesses can be sold one by one to keep the show going. It might take decades but GE will continue to decline slowly.
We used to compete with and sell to one of GE’s ” steller “industrial groups. We were a 3rd rate beat up tiny enterprise, yet we ran circles around this GE group. The GE guys were so arrogant and treated us like some backwoods hillbillies – but our quality was better, our margins higher, our inventory turns double, and delivery time less. Every time we returned from visiting our GE buddies, we felt confident and stronger.
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I can relate. We steal business from GE regularly and I never cease to be amazed at the stories their customers tell us of their arrogance.
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Reblogged this on John Barleycorn and commented:
More of this to come.
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GE is a classic example of the debt rot infecting the entire world. Be confidant that interest rates will never go up again until this debt house of card collapses. Increasing interest rates would be like lighting a match to a house of straw.
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http://www.marketwatch.com/investing/stock/ge/financials
GE’s net income appears to swing between $9B-$14B per year (2015 may be an outlier at $1.7B or so). What exactly would prevent GE from simply upping its contribution by $3B per year for a decade or so and returning to fully funded status?
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Can GE “default” on pensions without first liquidating/selling stock or assets, defaulting on its bonds, or declaring Chap 11?
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“What exactly would prevent GE from simply upping its contribution by $3B per year for a decade or so”
GE would be dead in the water, and current management loses big. GE would cease to be viable if it became strictly a welfare mini-state for funding the oversized pensions of Jack Welch (half a billion a year for life) and its former CEOs and all the lesser levels of employees. Investment capital would dry up, and GE would shrivel sans new financing. The only financing available for GE would be at exorbitant Puerto Rico and Chicago school board style double digit interest rates, which would make the company non-viable in competing for international projects.
Two possible longer term outcomes: Either a General Motors style bankruptcy or a FED-engineered hyper-inflation to devalue all debt. Inflate or die is the FED motto, as demonstrated by their commitment to a constant managed currency devaluation at 2% per year. And if the FED exceeds its stated goal by achieving 3%, 4%, 5%, 6% or even greater levels of price inflation (currency devaluation) via official statistics, they will undoubtedly celebrate with bonuses and champagne. Pension and USA.gov debt will get nominally paid off in the equivalent of Monopoly or Confederate dollars. But that will suffice to meet legal obligations. Winning = Losing.
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GE’s plan was not inflation indexed, and the company counted on inflation to slowly screw its retirees. With inflation running unexpectedly low, guess who screwed itself.
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Jack Welch was a fraud.
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