General Electric (GE, Financial), the company best known for its industrial technologies, owns the world's 38th biggest pension fund. With a fund that large, is it time for investors to start reconsidering their stock price?
In February of last year, after nearly 25 years of no employer-based contributions to the $45 billion pension, GE will be required to make an estimated $1.4 billion contribution to their long running program and $2.5 billion by next year. Amid the troubled financial market of 2008 and 2009, the company was forced to make a contribution after interest rates had been driven down. Pension contribution for U.S. employers is expected to total $100 billion in 2012, an increase of 67 percent. It is expected that over the next six years that total will be near $400 billion. With this large of a contribution made by U.S. employers, is there time for panic to commence?
On December 31, the company chose to close its defined benefit pension plan, with new employees switching to the more progressive 401k. The new terms include contributions equal to 3 percent matching of employee contributions. According to CEO Jeffery Immelt the company's pension plan contributed .14 per share in 2001, but is now negative .13 per share in 2011.
The plan went into effect in January of this year and the company expects lower costs going forward. Low interest rates are driving costs of the pension fund with bonds now purchased at record lows, the ability to gain raise revenue from cash deposits has decreased. In February, the company filed that its principal pension plans (unfunded) contained liabilities of $18.14, which are more than doubled from the previous year's $7.1 billion, an $8.5 billion increase. This was in part related to dips in the discount rate banks offer which went from 5.28 percent, to 4.21 percent. Because of this, the fair value of the company's assets fell from $44.8 billion to $42.1 billion the next year, leading to the first negative pension contribution to share prices.
Further Analysis
While the company manages to suffer from the increased costs of pensions and the U.S. Federal Government's requirements to have them fully funded within the next few years, the company still manages to have a strong financial bottom line avoiding capital investments and still gravitating toward investments in technology, medical imaging, energy and strong partnerships.
With the move to diversify the stock and develop an improved stock portfolio, the company is positioned to buy back nearly $12.5 billion in common stock, which should move share prices higher and provide extra capital for the company.
Risky?
Unlike General Motors (GM, Financial) which used pension funding increases to avoid union battles, GE has never had to deal with these types of issues. The company also has managed to profit from its pension and only until recently has managed to see loses, of $.14 per share. Once the loses were realized, the company quickly took action to fix the growing anxiety, which was a negative $.13 a share. Since then, the appropriate actions to end the program have been taken, and the company has adopted a more progressive 401k plan to offset long-term costs from pensions.
General Electric, like many companies, is tied to the world market and faces the same economic outlook as other industrial corporations. With European uncertainties and the overall state of the global market in uncertainty, GE stands to gain in other avenues. In the event of interest rates increasing the pension stays financed and the company's cash reserves remain protected. In the event rates stay below or near zero, as they currently are, the company can utilize it's resources to purchase technology and make acquisitions.
In the event of economic stimulus provided by world governments, the company will still continue to benefit from low interest rates and guaranteed payments from GE Capital through stronger lenders assist programs and new purchasers of industrial equipment.
In either scenario, GE should continue to secure, through its strong stock value, the many mutual funds and 401k plans that many investment firms rely on for their own retirement plans.
In February of last year, after nearly 25 years of no employer-based contributions to the $45 billion pension, GE will be required to make an estimated $1.4 billion contribution to their long running program and $2.5 billion by next year. Amid the troubled financial market of 2008 and 2009, the company was forced to make a contribution after interest rates had been driven down. Pension contribution for U.S. employers is expected to total $100 billion in 2012, an increase of 67 percent. It is expected that over the next six years that total will be near $400 billion. With this large of a contribution made by U.S. employers, is there time for panic to commence?
On December 31, the company chose to close its defined benefit pension plan, with new employees switching to the more progressive 401k. The new terms include contributions equal to 3 percent matching of employee contributions. According to CEO Jeffery Immelt the company's pension plan contributed .14 per share in 2001, but is now negative .13 per share in 2011.
The plan went into effect in January of this year and the company expects lower costs going forward. Low interest rates are driving costs of the pension fund with bonds now purchased at record lows, the ability to gain raise revenue from cash deposits has decreased. In February, the company filed that its principal pension plans (unfunded) contained liabilities of $18.14, which are more than doubled from the previous year's $7.1 billion, an $8.5 billion increase. This was in part related to dips in the discount rate banks offer which went from 5.28 percent, to 4.21 percent. Because of this, the fair value of the company's assets fell from $44.8 billion to $42.1 billion the next year, leading to the first negative pension contribution to share prices.
Further Analysis
While the company manages to suffer from the increased costs of pensions and the U.S. Federal Government's requirements to have them fully funded within the next few years, the company still manages to have a strong financial bottom line avoiding capital investments and still gravitating toward investments in technology, medical imaging, energy and strong partnerships.
With the move to diversify the stock and develop an improved stock portfolio, the company is positioned to buy back nearly $12.5 billion in common stock, which should move share prices higher and provide extra capital for the company.
Risky?
Unlike General Motors (GM, Financial) which used pension funding increases to avoid union battles, GE has never had to deal with these types of issues. The company also has managed to profit from its pension and only until recently has managed to see loses, of $.14 per share. Once the loses were realized, the company quickly took action to fix the growing anxiety, which was a negative $.13 a share. Since then, the appropriate actions to end the program have been taken, and the company has adopted a more progressive 401k plan to offset long-term costs from pensions.
General Electric, like many companies, is tied to the world market and faces the same economic outlook as other industrial corporations. With European uncertainties and the overall state of the global market in uncertainty, GE stands to gain in other avenues. In the event of interest rates increasing the pension stays financed and the company's cash reserves remain protected. In the event rates stay below or near zero, as they currently are, the company can utilize it's resources to purchase technology and make acquisitions.
In the event of economic stimulus provided by world governments, the company will still continue to benefit from low interest rates and guaranteed payments from GE Capital through stronger lenders assist programs and new purchasers of industrial equipment.
In either scenario, GE should continue to secure, through its strong stock value, the many mutual funds and 401k plans that many investment firms rely on for their own retirement plans.
