General Electric
will split into two companies in early April—a jet engine business called
GE
Aerospace and a power generation business called GE Vernova.
Wall Street analysts will spend weeks preparing reports about the fundamentals of each business while investors work out what to pay for each company’s stock. Both groups shouldn’t forget to check in on the health of GE’s defined benefit pension plan. Pension funding is a risk that bites investors from time to time.
In General Electric’s 2023 annual report, the reported pension obligation totaled just under $49 billion. Assets set aside to pay benefits totaled about $40.5 billion. The pension was about 83% funded. That’s OK.
A pension obligation is, of course, the present value of all the payments a company owes to its employees and retirees over time. Accountants and regulators, essentially, make companies discount those future payments at a low interest rate to be conservative. Think of it this way, the calculation means that GE’s benefit obligation of $49 billion could be fully covered with no extra contributions if GE had a $49 billion portfolio of Treasury bonds set aside.
Company pension funds, however, don’t invest only in Treasury bonds. They invest in stocks, corporate bonds, and other things that earn higher returns than Treasury bonds. That creates a natural gap between the obligation calculated and the assets set aside to cover it.
A defined benefit pension plan funded between 80% and 90% is, frankly, OK—although 90% would be a little better. Industrial companies in the
S&P 500
have assets equaling about 95% of their obligations, according to FactSet.
General Electric, of course, is about to be no more. The pension obligation for GE Vernova, according to recent filings, will be about $17.5 billion. Assets to cover that will be about $16 billion. The funded status will be about 90%. That looks solid. What’s more, Vernova will start life with no debt and about $4 billion cash on the balance sheet.
That will leave GE Aerospace with a pension obligation of about $31 billion and assets around $25 billion. The funded status should be just under 80%. GE Aerospace would need about $3.5 billion in additional pension contributions to get the funded status back about 90%. That extra $3.5 billion is what investors can consider as extra ‘pension-related debt’ for the Aerospace business.
That amount won’t change the way the GE Aerospace balance sheet looks to investors. It will remain solid.
Jefferies analyst Sheila Kahyaoglu estimates GE Aerospace will have about $7 billion in debt minus its cash when the spinoff is complete. That is a little less than one times estimated 2024 Earnings before interest, taxes, depreciation, and amortization, or Ebitda. Adding an extra $3.5 billion to account for pensions, the ratio goes to about 1.4 times.
Both numbers look fine. The ratio for the average industrial company in the S&P 500 is about 1.6 times, according to Bloomberg. What’s more, GE Aerospace is expected to generate strong free cash flow for years to come.
Both Aerospace and Vernova will start life as independent companies with investment grade debt ratings.
For the end of 2023,
GE Healthcare Technologies
—the company GE spun out in 2023—reported a pension obligation of just under $23 billion and assets of just over $19 billion. The funded status was about 84%.
To be sure, investors have to pay attention to pensions when investing in large, older, industrial enterprises—the kind that offered workers fixed payments in retirement instead of paying a defined amount into a 401(k) or related employee-directed retirement plan along the way.
Checking in is always a good idea. For all the GE-related companies, things look OK.
Write to Al Root at [email protected]
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