To Our Investors
Bubbles burst and excess ends in an ugly fashion. The easy credit cycles that defined the recent past have given way to a tidal wave of financial crises. As I am writing, banks have written off almost $150 billion, entire classes of securities have disappeared, and rating agencies have been criticized. This transition — from easy credit to no liquidity — seemed to occur in the blink of an eye.
Housing was particularly challenged. After fueling consumer wealth for many years, U.S. housing prices declined for the first time in 40 years. Subprime lending standards and complex investment products with risks that were not clearly understood created a “hangover” for consumers and financial institutions.
The environment we face today is a challenging one. How will the U.S. consumer respond to falling housing prices? Should we worry about inflation or recession or both? Can the global markets expand while the U.S. contracts? What impact will the U.S. election have? Will banks resume lending money again at normal levels — when, and at what price?
You could try to pick the perfect investment for this environment, but it would be a challenge. Maybe it is in technology, or emerging markets, or commodities, or Treasury bills.
Or, you could pick GE. A company leading in the essential themes of this global era. A high-performance company filled with strong businesses. A company dedicated to developing leaders. A company built to perform in good times and bad.
One reason for my confidence is our performance. Even in these difficult markets, 2007 was another record-setting year. Revenues grew 14% to $173 billion. Earnings from continuing operations grew 16% to $22.5 billion. We generated record industrial cash flow, and returned $25.4 billion to investors through the dividend and stock buyback.
We performed well against the operating metrics that we use to measure our progress. Organic revenue growth was 9%, surpassing our goal of growing at 2 to 3 times GDP growth. Earnings per share (EPS) from continuing operations grew 18%, well above our double-digit goal. Our operating profit margin grew 70 basis points, below our 100-basis-point goal, but we made good progress. Returns reached 18.9%, and we are on track for 20% in 2008. Industrial cash from operations grew 15%, well above our target, and our free cash flow was $19 billion.
Can we continue to perform well in 2008? It will be challenging, as we expect U.S. consumer spending to slow and credit to tighten and be more expensive. However, GE is well-suited for this environment and any other. This is because we invest and deliver. We do this every day, every quarter, and every year.