We Can All Learn from General Electric's (GE) Quiet Success Story

This morning, I want to focus on a good news story: It is a tale of a massive turnaround and even more massive success, but it will probably have escaped the attention of most investors who don’t have a direct interest in it given how little attention it has received. The turnaround at GE (GE), from a company that was on the edge of bankruptcy a couple of years ago to one whose stock has gained around 90% in the last year, is something that should be celebrated. However, presumably because it has come without any hoopla about AI or controversial statements from its CEO, or anything else that might drive clicks, it has been accomplished very quietly. I must admit though, that when it comes to not writing about GE’s success, I am, until now, as guilty as anyone.

I last wrote about GE in these pages in July of 2021. Not to brag, but looking back, that article was actually quite prescient. In it, I spoke of how the GE CEO, Larry Culp, was focusing on free cash flow above all else. Under previous CEOs, men who in their time were hailed as great businessmen and leaders, GE had been driven into the ground. They had borrowed heavily to finance acquisitions and had started to do so to pay dividends and finance stock buybacks. That wasn’t quite as dumb as it sounds, given that money was basically free at that time, but by July of 2021, eight months before the Fed even considered a rate hike, it was clear that that situation would change before too long. As I wrote at the time, “The recovery from the pandemic is continuing apace, but there are some trying times ahead, with inflationary pressure and supply chain issues that come with such a rapid bounce back.”

Larry Culp was one of the few people who not only saw those problems coming, but also took the painful decisions that were needed to prepare for them. He broke up a company that had for years been the poster child for “big is beautiful,” cut the dividend -- the thing that had almost defined GE as an investment for decades -- to a penny, and implemented a ruthless program of efficiency improvements, all designed to achieve one aim: to generate free cash flow. He succeeded so well that the stock, not even accounting for the spinoffs, has massively outperformed the S&P 500 in the period since I wrote that piece:

There is a lesson here for investors, indeed for us all, that goes way beyond the obvious one of "I should have bought GE back then."

We live in a world so full of bad news that many of us have almost become inured to it. We quickly tire of stories about the horrors of war, whether it is in Ukraine, Gaza, or even when American lives are being lost, and the politics of insult and division have become so commonplace that what would once have been considered shocking personal attacks now barely warrant a mention in the media. In part, that is the fault of me and those like me who write or broadcast for public consumption. Headlines containing words like "crash," "chaos," or "carnage" get a lot more attention than a story that basically says that everything is fine, so it is easier and more profitable to focus on the negative, even if it means ignoring good news.

Good news, though, can often teach us a lot more than bad. Focusing on bad news and taking failure as an object lesson on what to avoid does have its uses, but it still leaves a basic question unanswered: what next? It is fine knowing what not to do, but that doesn’t always help us with what to do. The GE story, of a CEO who focused on cash flow and balance sheet strength rather than flashy acquisitions, and who slaughtered some sacred cows along the way, is an object lesson for others.

Businesses should be about making money, not growing the popularity or ego of the CEO, and making money sometimes means doing things that are unpopular, but that ultimately are right for the times. The problem is that when a business leader does that, the bad news of the unpopular decisions receives a lot of publicity. Should they successfully engineer a turnaround though, it can sometime pass almost unnoticed. Let’s do what we can to put that right in at least this one instance.

Since Larry Culp set about changing things, GE’s stock has outgained the S&P 500 by a factor of eight or nine, and that is a story that should be getting more attention, as is how he did it. He got there by focusing on business fundamentals. He didn’t chase the latest trend or seek personal fame in any way, he just ensured that GE made money. That is something from which everyone, traders, investors, and CEOs alike, can learn.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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