The thinking on General Electric Company (GE) is that it is finally turning around.
GE stock is up 21% this year, fifth best among the 30 stocks in the Dow Jones Industrial Average.
General Electric shares have been regularly closing above $30 for about a week — the last time GE closed above $30 was June 2008. It hit a at $30.12, its first close above $30 since June 2008. And GE stock notched a multiyear high of $30.82 last Friday (though it pulled back a little into the close).
Lots of people are getting excited about GE stock because the company is going back to being an industrial technology company, with roots that include installing the first electrical system for the Panama Canal. But getting excited about General Electric and actually buying shares of GE stock might be two different propositions.
To be an investor in GE shares over the past 15 years has required patience and a strong stomach. The odds look in your favor, but patience still might be required.
How General Electric Is Marching Forward
GE is making good on a goal, announced in April, to reduce the size of its financial services businesses by half or more. Organized as GE Capital, the business threatened serious damage to the company overall during the worst of the 2008-09 financial crisis. A $3 billion investment from Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) helped stabilize the situation.
In 2008, about 42% of General Electric’s revenue came from financial services and about half of its profits. For the first nine months of 2015, the revenue percentage had dropped to a bit more than 18% as GE systematically spun off or sold huge chunks of the $500 billion in assets it used to have — assets large enough to be the seventh-largest bank, The Wall Street Journal said.
GE has spun off its consumer financial services business into Synchrony Financial (SYF), starting with an initial public offering last year and a stock distribution this year. You may not know the Synchrony name, but you may be one its customers if you have a credit card from Walmart (WMT), Lowe’s (LOW) or Amazon.com (AMZN), as well as thousands of other companies.
Other deals have come quickly. This spring, for example, General Electric announced a deal to sell $23 billion in real estate assets to a partnership of Wells Fargo (WFC) and Blackstone Group (BX). Then last month, GE hocked a major piece of its commercial lending business worth some $30 billion to Wells Fargo alone.
Meanwhile, GE, which has operations in 170 countries, is seeing decent organic growth in most of its key industrial segments, including healthcare and power. The jet-engine business is so strong that it forced competitor Rolls Royce Holdings (RYCEY) to issue a profit warning and suggest it may cut its own dividend.
An exception to this rosy picture is GE’s oil & gas business, which has been hit hard by collapsing oil prices.
On the company’s conference call last month, CEO Jeff Immelt described his operating environment like this: “U.S. a little bit better every day. Europe stable to up; and then emerging markets volatile.”
Well and good, but the stock is the problem.
Why GE Stock Isn’t as Rosy
The 21st century simply has not been kind to GE stock. General Electric shares have risen only 3.5% a year since 2000. The stock fell 50% during the 2008 crash. GE is still down nearly 50% from its all-time high — $60 (adjusted for splits), reached on Aug. 8, 2000 — and 25% from Sept. 7, 2001, the day then-CEO Jack Welsh retired and Jeff Immelt took over.
Total return looks awful, too. If you bought GE stock 10 years ago and reinvested your dividends, your total return was just 27.5%, or 2.45% a year, according to Stocksplithistory.com. Apple’s (AAPL) was 1,320%, or 30.4% annually. Even Walmart performed better: 45.2% over the 10 years — 3.8% a year.
While GE has paid a dividend every quarter since 1899, the payout has been volatile. The 2008-09 financial crisis forced a cut from 31 cents a quarter to 10 cents. It’s back up to 23 cents, producing a roughly 4% annual yield. But Immelt said the company expects to keep the dividend at 23 cents through 2016 “and grow it thereafter.”
Much of the drag on the stock price was investor worries about the enormous size and the riskiness of GE’s financial services business. And, with it, the headaches of increasing regulation, especially federal regulation, on all large financial services organizations. And that problem is getting resolved.
Which brings us to the buy-or-not question.
There are a few worries. Like that GE’s roughly 20% gains this quarter have come solely from activist investor Nelson Peltz’s interest in the company. Or a big risk for GE stock and the economy should the Federal Reserve make a mistake on the interest-rate front — raise too rates too high and too fast, and the dollar soars against other currencies, which will hurt GE, who collects more than half of its revenue from outside the U.S.
Weakness in markets for oil and gas production is a concern, too considering that’s about 15% of GE’s sales. Light sweet crude is trading at about $42 a barrel.
Still …
Why GE Stock Is a Buy … Eventually
The balance sheet is solid. Revenue is strong, if not gaudy. ($123.4 billion projected for 2015 and $126.5 billion in 2016.)
General Electric is profitable. Wall Street is expecting $1.31 a share in earnings in 2015 and $1.52 in 2016. Its cash flow is stronger. The company is moving quickly to remake itself. Nelson Peltz will help that process along.
GE will continue to buy back shares. The dividend looks stable, and Immelt has been clear he wants to grow it in the years ahead. General Electric then becomes a wonderful dividend and growth stock.
If you believe, as many analysts and investors do, that General Electric is on the right track in reducing its financial services exposure, GE stock looks like a good long-term buy. The headwinds are and will continue to be present, but they may work to your advantage, and let you choose when to jump in.
As of this writing, Charley Blaine did not hold a position in any of the aforementioned securities.
