Our conclusion that GE’s stock (GE) still isn’t cheap produced a few howls of protest. Why? Because some GE shareholders like to imagine that they own a lightbulb and jet-engine manufacturing company that also happens to have a financing arm.
Unfortunately, they don’t.
GE shareholders own stock in the General Electric Company, which owns GE Capital and GE. As Warren Buffett is fond of pointing out, anything multiplied by zero is zero. So if GE Capital is worth zero, GE probably is, too. (Let’s hope it isn’t.)
You can think of the General Electric Company as a big bag of assets: Financial, manufacturing, cash, buildings, etc. These assets are owned and financed by two groups of folks:
- Debtholders, who have loaned the company $525 billion
- Stockholders, who own everything that’s left over after the debtholders have been paid off.
Now, it would be nice to imagine that, if GE Capital suddenly rolled belly-up, GE shareholders could just ignore the $515 billion of GE Capital debt and run off with the industrial side of the shop. But they can’t.
Both GE Capital and GE are owned by the General Electric Company (which is the company you own stock in). And the General Electric Company, therefore, has $525 billion of debt.
If GE Capital goes belly up, GE Capital debtholders will demand their money back. If they don’t get it from GE Capital, they’ll go after the parent company’s assets, which include the industrial business. And only when the full $525 billion has been paid back debtholders will GE shareholders get a dime.
So, GE shareholders, don’t delude yourselves into thinking that you own a lightbulb and jet-engine manufacturing company that also happens to have a financing arm. You own a conglomerate with $797 billion of assets and $525 billion of debt. And the only assets you own are the ones left over after those debtholders get their $525 billion back.