Friday, December 7, 2007

GE - past success, future potential

I recently bought some General Electric (GE) shares for my wife's Registered Retirement Savings Plan. GE also makes up about 6.5% of my non-registered portfolio.

General Electric (GE) is a diversified technology, media, and financial services company focused on solving some of the world's toughest problems. GE operates in 100 countries and employs over 300,000 people worldwide. With a market cap of of around 376 Billion GE is one of the largest companies in the world. I believe it is currently # 2 behind Exxon Mobil (XOM). GE spends about $1 per earth citizen, per year on research and development. Founded in 1892 GE is the only current member of the Dow Jones Industrial Index that was listed on the original exchange which begun in 1896.

Consistency
As mentioned GE has been around for 116 years. They have paid a dividend each quarter for over 100 of those years. They have raised their dividend each year for the past 31 years. The company has also grown its earnings per share (EPS) in 9 of the past 10 years. GE has also grown its net profit margin every year for the past 10 years. Through many wars, the great depression, and other unforeseen events and trends on a global scale GE has endured and profited. GE is also constantly praised for their quality of management and corporate responsibility.

Shareholder Returns
$1,000 invested in GE shares 20 years ago in 1987, would now be worth $7,300, and would be yielding 22% on initial cost. So your GE shares bought in 1987 would be paying you $220 per year, paying for themselves over and over again at a current rate of under 5 years.

Global Growth, Infrastructure Improvement, & Health Care
GE is well positioned to take part in emerging market growth in the BRIC countries as well as the maintenance and improvement in infrastructure that is required in most of the developed world. As an example, China's air traffic is expected to double to 240 million people by 2010. GE is making lighter more fuel efficient aircraft engines to meeting this growing demand. Water process technology, and health care are two more large segments of GE that are expected to grow swiftly in decades to come. Demographics should be kind to GE, if manged right, as some of us will require diagnostic equipment while others on the other side of the earth will require more basic needs like clean water, trains, and energy.

The Environment
GE is on the forefront of providing solutions for environmental management. The ecomagination commitment is allowing GE to lead the way in green products and services. From solar panels and wind turbines to water filtration technology, GE is not waiting for trends to emerge, they are innovating a providing customers with advanced solutions to meet their environmental needs now. This point makes GE a great low risk play on the environmental movement which is shaping up to be a huge theme of the twenty first century.

The Current Valuation
Have a look at a 10 year chart for GE and you will see a good example of P/E multiple compression. The market absolutely got enamoured with GE as a growth stock from 1998 to 2000 during the tech boom. The stock actually traded up as high as $60 per share at its peak, representing a P/E of around 47 times earnings. 2000 would have been a really bad time to buy this stock, and why would you unless you thought GE could grow it's earnings consistently at rates in excess of 25% per year. It is hard to imagine now how investors back in 2000 ever got the strange idea that a company as large as GE, which operates in so many different areas, could grow so quickly to be worth 47 times earnings. Since then the stock price has come off in a huge way before trading at around $23 at the start of 2003 growing to around $37 today. All this time, as Mr.Market had his way with GE, the actual company just kept chugging along growing earnings nicely, while spinning off ever increasing cash in the form of dividends to shareholders.

This brings us to the present where investors are giving GE very little credit for its growth, consistency, and global reach and breadth. A stock can only be held back for so long while it continues to grow its earnings and dividends. Obviously I believe GE is good value today as it is trading at about 17x earnings and 15x forward earnings. This price presents very little downside to this stock which is obviously positioned to benefit from $USD weakness and global growth. Earnings estimates are in the 10-12% range for the next five years. 9 out of 11 analysts have it as a 'buy'.

Getting down to the nitty gritty of valuation, my models tell me that GE should be bought at around $38 and below. I gave GE a 10.4% growth rate in earnings and a historically conservative P/E of 17 to arrive at these numbers. The stock yields around 3 points currently, and executives are likely crunching the numbers for another dividend increase as I write this. The dividend will likely be raised in December, 2007 to $0.31/share giving this stock a yield of 3.3% on Friday's close.

You won't get rich quick holding GE, but if you are a long term dividend growth investor like me, you might just get rich slowly. These are the types of stocks that I can't get enough of. It is difficult to find a more consistent grower of dividends and earnings, that is seemingly so well positioned for global growth trends than General Electric. GE is certainly no longer your Grandfather's light bulb firm.

6 comments:

4Life said...

MG: Many years ago some friends and I were discussing stocks and someone posed the question, "If you could only buy one stock for the rest of your life what would it be?". After some thought my answer was GE. This was back in the Welch days.

Best Wishes,
Dividends4Life

Div Guy said...

I have held shares of GE since the early 90's and I just keep adding to them.

rob said...

compary HD and GE in 5yrs and 10 yrs periods, they have almost the same gains, they all good.

Middle Class Millionaire said...

A great long term hold.

I'm a huge bull on their eco-imagination strategy. I think their foresight will really pay off in the years to come.

MCM

Anonymous said...

May I ask you guys what do you think of GE now?
Do you still believe in it? At the present price for the long term I guess it is an opportunity of a lifetime.
your thoughts?

remus

MG (moneygardener) said...

I still like GE but like so many other companies involved in the financial space there will be issues there.

The rest of GE's portfolio is really well positioned for global trends in the future. There could be plenty of more short term problems and the financial arm is a tough pill to swallow. I am holding and I am optimistic about GE's future.