GE stock: Debt issue | From over 100 billion to 70 billion

May 26, 2021

I like to figure out if I should start to invest GE stock. 

Does GE Have Too Much Debt? Not for Long.

The industrial giant might seem to be overburdened with debt, but it has a clear path to finish fixing its balance sheet by 2023.

For years, bears have criticized General Electric (NYSE:GE) for its heavy debt burden. Not too long ago, it was a reasonable concern: At the beginning of 2018, GE was drowning under a $134.6 billion debt load.

However, GE has worked hard to sell assets over the past three years, allowing it to pay down debt. And while the company's debt load may still seem high today, General Electric has a clear plan to significantly reduce its leverage and restore its balance sheet to health over the next couple of years.

Solid progress so far

Since recognizing the need to pay down debt a few years ago, GE has sold a slew of assets to raise cash. For example, it divested various pieces of its power business, a healthcare IT business, and its transportation segment, netting over $10 billion of cash proceeds.

Next, GE began selling off its stake in Baker Hughes in late 2018, raising billions of dollars. Most significantly, it offloaded its biopharma unit to Danaher in early 2020 for net cash proceeds of $20 billion. The GE Capital unit has steadily sold off assets, too.

Thanks to these moves, GE has already reduced its debt load dramatically. The company ended last quarter with just $71.4 billion of borrowings. (It also has a pension deficit of a little more than $20 billion.) GE will reduce its debt further next month, thanks to a recently launched tender offer that should enable it to retire several billion dollars of debt.

For years, bears have criticized General Electric (NYSE:GE) for its heavy debt burden. Not too long ago, it was a reasonable concern: At the beginning of 2018, GE was drowning under a $134.6 billion debt load.

However, GE has worked hard to sell assets over the past three years, allowing it to pay down debt. And while the company's debt load may still seem high today, General Electric has a clear plan to significantly reduce its leverage and restore its balance sheet to health over the next couple of years.

Solid progress so far

Since recognizing the need to pay down debt a few years ago, GE has sold a slew of assets to raise cash. For example, it divested various pieces of its power business, a healthcare IT business, and its transportation segment, netting over $10 billion of cash proceeds.

Next, GE began selling off its stake in Baker Hughes in late 2018, raising billions of dollars. Most significantly, it offloaded its biopharma unit to Danaher in early 2020 for net cash proceeds of $20 billion. The GE Capital unit has steadily sold off assets, too.

Thanks to these moves, GE has already reduced its debt load dramatically. The company ended last quarter with just $71.4 billion of borrowings. (It also has a pension deficit of a little more than $20 billion.) GE will reduce its debt further next month, thanks to a recently launched tender offer that should enable it to retire several billion dollars of debt.

Second, GE will finish selling its Baker Hughes stake by 2023. It recently unloaded nearly $1 billion of shares, but the company still holds approximately 268 million shares of its former subsidiary. Based on Baker Hughes' recent trading price of around $25, those shares are worth roughly $6.7 billion.

Third, GE will eventually sell the AerCap shares it receives in the GECAS deal. Those could be worth $6 billion -- or even more, if investors bid up the price of the aircraft leasing giant as the airline industry recovers from the COVID-19 pandemic.

Fourth -- and perhaps most importantly -- while the pandemic has temporarily reduced EBITDA for GE's aviation unit, that segment's profitability is already bouncing back. That recovery will likely accelerate next year as the global economy reopens and air travel volumes rebound.

This EBITDA recovery will boost GE's free cash flow, enabling some organic debt reduction. In addition, higher EBITDA will allow the company to support a greater debt load while meeting its long-term leverage target. By the end of 2023, General Electric should have a very healthy balance sheet. Combined with its expected post-pandemic earnings recovery, that could send GE stock flying higher.