Whenever you see the name Nelson Peltz, it’s usually preceded by the adjective “activist.” And that word, depending on who defines it, either means someone who buys a huge stake in a company and shakes up its torpid and self-serving management so the company can thrive, or someone who loads up the company with debt, strips it of assets (chiefly old-fashioned cash), and moves on to the next corporate target.
In the interest of full disclosure, I tend to think that the activists are right about self-serving managers, and managers are right about the greedy, company-killing activists. Both camps care mostly about themselves and little or nothing about employees, shareholders, or the company, despite bloviation to the contrary.
What it Means
So why is Nelson Peltz and his Trian Fund Management’s decision announced Monday to invest $2.5 billion in General Electric (GE ) so important?
Instead of calling for drastic restructuring or other dramatic moves, Peltz wants GE CEO Jeffrey Immelt to take on an additional $20 billion in debt for more buybacks, cool the drive for mergers and acquisitions, and cut costs more aggressively. It’s the standard slash and borrow philosophy we see in all activists, but nothing outrageously piggish.
In short, Peltz wants GE to snap out of its delusion that it can be a growth company, high-tech or otherwise, and wake up to what it is: a mature, steadily growing corporate giant whose enormous profits and cash can be milked by investors. Of course, big investors would get more, but there would even be plenty for ordinary investors, too, especially in healthy dividends.
That would be great news for individuals who favor dividend investing, of course. But when you think about it further, there’s a sad truth to the Peltz message, even if you’re not wild about the messenger.
Disinclined to Grow
The truth is — and you know it if you’ve worked for a giant company and are honest — big established companies are so bureaucratic and political they can’t be true innovators or growth companies. Yes, they’ll pull financial tricks out of their hats to give the illusion of growth, or they’ll ride along an economic upturn and make use of all the political benefits and subsidies they reap. But they rarely, if ever, come up with anything new that’s as big as the thing that made them big in the first place.
The American economy abounds with such examples: Eastman Kodak, RCA, Wang, Zenith (now part of Korea’s LG Electronics), Polaroid. While it seems inconceivable now, companies including GE and IBM could wind up being taken apart or simply winding down due to new competitors in various areas of their current businesses.
The good news is that America is full of rich, adventuresome people who want to get in on the next big thing. And that translates into a booming venture capital business. One of the reasons New York City is booming — aside from the condomania among Russian oligarchs, Chinese billionaires and despot-fleeing South Americans who are pricing mere millionaires out of Manhattan — is the tens of thousands of people employed by tech start-ups fueled by VC.
Until Acorns Turn to Oaks
Who knows what great dividend-paying companies — and possibly the next GE — will emerge from those VC-powered acorns. In the meantime, dividend investors should realize that they are investing in companies that may be in the autumn of their years. Autumn, as we are once again enjoying, has some of the most wonderful days of the year. And these autumn-like companies are some of America’s most beloved giants. But just as we savor October’s crystal sunny days, we must enjoy America’s dividend giants while we can. For companies in their autumn, like the season itself, there’s poignancy in the present because we know what’s coming next.