GE’s Demise: Unsustainable Business Model or Changing Times?

When I saw the news that General Electric (NYSE: GE) would be replaced in the Dow Jones Industrial Average by Walgreen’s Boots Alliance (NYSE: WBA), it made me think about how much GE has fallen in the last 17 years. Not just how much the stock price has fallen, but in terms of the importance of the company and the value of the company.

I moved to Florida in 2006 and prior to that I lived in Ohio, just north of Cincinnati. My neighbor on the left worked in the accounting department at GE’s plant on the north side of Cincinnati. The neighbor one-house down on the right worked in the legal department of the same facility. It was a brand new neighborhood and we all moved into our houses within a year of one another and it was in 1997-98.

At that time, GE was flying high. Jack Welch was at the helm and the company became the most valuable company in the United States during his reign. The company was so successful that Welch was named the best manager of the 20th century by Fortune Magazine. When Welch retired in 2001, GE’s stock was hovering around the $25 mark. It closed under $13 yesterday. The S&P 500 is up over 100% during the same period, and that’s after going through two bear markets.

GE had been one of the components of the Dow since 1907, and it had fallen to the point that it was the cheapest stock in the Dow. Jack Welch was hailed as a management genius and many rated him as one of the greatest CEOs in history. Unfortunately, his reputation has taken somewhat of a hit since his retirement. Many consider the model that he built at GE unsustainable.

At a management conference in the same year he was named manager of the century, Welch said, “My success will be determined by how well my successor grows it in the next 20 years.”

Mr. Welch’s own comment seems to take some of the shine off of his time at the helm of GE. Personally I think he was the right man at the right time for the company. He was energetic and charismatic, and he helped slim the company down, especially at the top. But his idea of building a conglomerate that would only operate in industries where the company was ranked number one or number two has since been debunked.

I mentioned earlier that I moved to Florida 12 years ago, and that leads me to the fact that GE is being replaced by Walgreens Boots Alliance. My neighbors don’t work at Walgreens, but there is a store on every major corner down here it seems. I live in Palm Beach County and there are approximately 75 in this county alone.

To me, it is a reflection of how our society has changed. You have an industrial giant like GE falling and being removed from the Dow to be replaced by a drug store chain. Our society is aging and we are more reliant on pharmaceuticals than ever. Our society is also more health conscious than ever.

The healthcare industry has been one of the best performing sectors since the end of the bear market in 2009. If you go back to the beginning of 2001 when GE was trading at $25 and the S&P 500 was around 1,300, the Healthcare Select Sector SPDR was at $22.50 and it is now over $85. That means the ETF has gained over 300% since the beginning of 2001. No wonder the index committee wants more healthcare stocks in the mix.

I think the change in the Dow is a combination of factors. I think the model built by Jack Welch was unsustainable, but he was the right person to lead GE when he did. I also think the aging of our society played a factor in GE’s decline and the rise in technology was a factor as well. Regardless, it marks the end of a 111-year stretch for GE being a member of the Dow.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

3 comments

  1. Robert E. Vitro, CPA, MBA

    I am a retired GE Manager of Finance (employed : 1957-1985 ). Shocked to learn GE dropped from DOW. While I was at GE we were generally regarded as the best managed company in the country. GE was the foundation of the DOW. So what did go wrong? in my opinion, change in management style weakened the management structure. Moreover the shift from GE manufacturing strengths to heavy duty commercial financial funding, an area where GE had little background or experience turned out to be catastrophic. I hope for a comeback. we shall see.

  2. The seeds of GE’s decline were planted by Welch’s grand plan to remake the company from a manufacturing base to a high flying financial services entity. He grew the profits in the 80s and 90s up until the house of cards came tumbling down in the debacle of 2008. By then he had retired with a golden reputation as a corporate genius, and left Immelt holding the bag. The really precipitous decline in stock value came then and has struggled ever since.

  3. R.THEODORE DAMASK

    Thee comments makes me think that GE strategy MIRRORED that if the other General=
    =General Motors where the GMAC division becames a larger factor in the company than the Auto manufacturing plants. maybe there are other problem corporations still waiting for the same problems..

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