Sunday, March 16, 2008

the numbers work for GE

I took the recent weakness in share price of dividend growing General Electric (GE) as an opportunity to add to my position in the company. This past Friday I bolstered my position in the global conglomerate, which builds jet engines and owns the media network NBC. For most of my general thoughts on why I believe GE is a great investment, see my post titled GE, past success, future potential.

Stock valuation-wise here are some of the key points that make GE so attractive at these levels. Let's look at GE over the last 5 years, since 2003:


  • In 2003 GE traded between $23 and $33 per share.
  • GE's EPS was $1.40
  • In 2003 GE paid a dividend of $0.19 / share.
  • GE's dividend yield ranged from 2.3% to 3.3%
  • In 2003 GE's Return on Equity (ROE) was 17.7%

The Key Fundamentals of Growth Since 2003

  • GE has grown it's annual EPS consistently from $1.40 to $1.59 to $1.64 to $1.86 to $2.20 in 2007.
  • GE has grown it's quarterly dividend consistently every year from $0.19 to $0.20 to $0.22 to $0.25 to $0.28 to $0.31 currently.

GE is currently cheaper than it has been at any time in the past 5, maybe 10 years...

5 years later, I bought the stock at $33.47 this past Friday. Should I have been able to get the stock this cheap given it's earnings growth and dividend growth over the past 5 years?

  • The stock currently yields 3.7%, easily right near a 5 year high, and there is no reason to think GE won't continue raising it's dividend at swift rates in 2008 and beyond.
  • GE's Return on Equity in 2007 was 19.4%.

In Summary

So why is GE such an attractive buy today? It is all in the numbers. Today vs. 2003 - GE is earning $2.20 vs. $1.40 per share (36% more), GE is now paying $0.31 vs. $0.19/share in dividends (40% more), GE is currently more efficient at generating profits, showing a ROE of 19.4% vs. 17.7% in 2003. All this for a 47 cent premium on it's 2003 high trading price, giving the shareholder 3.7% of his/her money back annually, whereas in 2003 he or she would have received only 2.3% back as yield on their investment in GE. While these numbers are compelling to show GE's relatively attractive valuation, some might see the recent enthusiastic insider buying by CEO Jeff Immelt as a bullish sign as well. While Jeff should have a unique view of where GE is going in the next 2 years, he might just be buying because he too has looked at where GE has come from and realized the company is cheap relative to it's history.


Dividends4Life said...

MG: I agree GE is a good buy at its current price. Years from now when the market recovers we will look back and wish we had this opportunity once again.

Best Wishes,

Middle Class Millionaire said...

I agree it's a great long term hold and one I want to eventually add to my portfolio. Does the potential for a global slowdown concern you at all? or do you think that's already factored into the price?

MG said...

I'm not sure if a major global slowdown is factored into the price, likely not. I think the fact that GE garners a signif. portion of it's EPS from financial is what is really hurting the shares. Their financial side is pretty solid though as Immelt commented that if anything he would be a buyer of distressed assets etc.

telly said...

I'm still in the process of learning to analyze stocks (and seem to be making plenty of mistakes along the way :( ) but I can't seem to turn GE into a buy. Decreasing cash and increasing long term debt as well as a P/E that's 2x (5 yr) earnings growth makes me stay away.

You make some great points though and I will reread your GE posts to get more insight.

MG said...

telly, How do you figure the P/E is 2x the 5 year earnings growth. I see that EPS has grown at 12% per year over the past 5 years...?

telly said...

The Reuters ProVestor Plus Report I have reads 7.7% and EPS numbers of:
2007 - 2.2
2006 - 1.99
2005 - 1.72
2004 - 1.59
2003 - 1.55
which give me 7.9%. Not sure how we're so far off...

MG said...

Even using those numbers I get greater than 9% EPS growth compounded. I used the numbers which are in my post, which you can see on my link to MSN money.

Thicken My Wallet said...

GE acts like a bank stock before bankers lost their head. Good steady earnings year over year. Doing all the right things in terms of increasing dividend and buying back shares, increasing cash flow from operations. No stupid bets. A great widow and orphan stock. P/E has fallen to an attractive valuation.

I don't think GE will be too adversely impacted by the global slowdown. They are in fields now that people have to invest in: infrastructure, energy, health care which are not cyclical.

...but GE may have become too big for its own good. Wall Street doesn't understand it and discounts it as a result. I wonder if GE may have to break itself up in a few years (another reason to buy!)