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GE Starting to Play Offense

Jeremy Glaser

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser. General Electric reported third quarter results. I am here with analyst Daniel Holland to take a closer look.

Thanks for joining me, Daniel.

Daniel Holland: Thanks for having me, Jeremy.

Glaser: So how would you characterize this quarter?

Holland: Well, the results were largely in line with what we expected. You had some weakness in the revenues in the industrial side, but profitability held up pretty well.

GE Capital, again, is kind of on the mend, had a very nice profitable quarter, $832 million from continuing operations. So what you are seeing is kind of a more focused and restructured GE Capital business that I think is going to serve GE well going down the road.

Glaser: Is the company still producing a fair amount of cash?

Holland: It is. So one of the key takeaways from the call this morning was that GE is actually going to be at the high end of its cash guidance for this year at $14 billion to $15 billion of cash generation from its industrial operations, which in our opinion is pretty strong, just given the environment that GE has been operating in, it's been able to deliver in this range for some time. So, it's something I think is good to think about.

Glaser: So, with all the cash being produced, what are management plans for it?

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Holland: Well, if you take a look at what the company has done in the third quarter, you have got some pretty good signals here. They raised the dividend back right after they released the second quarter results. In the quarter they had $1 billion of share buybacks. In addition, just last week, they announced a $3 billion acquisition of Dresser. You have had some acquisition activity out of GE Capital, and some other smaller renewable energy type of deals that have been going on.

And so what you are looking at is a company that's kind of changing the page a little bit from the safe and secure mode that it was in a couple of years ago to now being a bit more on the offensive side, saying, well, let's go ahead and play offense with this capital. We are going to go ahead and return some value back to shareholders, and we are going to go and acquire some businesses that we think are going to help out our core portfolio.

Glaser: It sounds like there is lot more confidence there.

Are you expecting further dividend increase in the near future?

Holland: I would expect to see the dividend continue to grow in line with the earnings. So as you see earnings bounce back in 2011, I think that a dividend increase is definitely something that's going to come down with it as well.

Glaser: Would you expect for there to be further sales of businesses they don't really see as core? I know NBC Universal is on the way out; are there other areas you think that they might divest from?

Holland: Right now, I mean, the portfolio is kind of starting to take shape. I think there might be some one-off situations, but I think that largely there are no other big pieces that I expect to move out. But I am curious about the pieces that are going to be coming in.

Glaser: What are some avenues you think that they are going to look at for acquisitions?

Holland: Well, they will continue to look at the energy business, because that's one of the areas that GE has a very solid core competence, can easily add on the service agreements, which are very high margin for the company, and they have got experience doing that.

So I would expect to see the company continue to look at the energy side, and see if there are other acquisitions potentially in the health-care space as well, just as it gets its arms around what the new health-care environment is going to look like.

Glaser: That's great. Daniel, thanks for talking with me today.

Holland: Thanks for having me, Jeremy.

Glaser: For Morningstar.com, I'm Jeremy Glaser.