Only a week into June and i already pulled the trigger on initiating my first position in over two months. General Electric is a diversified technology and financial services company whose products range from aircraft engines, power generation, water processing, household appliances to medical imaging and industrial products. GE is technically the largest conglomerate in the world if measured by market capitalization. This makes GE one of the best investment options out there when trying to diversify your portfolio with minimum risk.
During the 2008 financial crisis, General Electric found itself on the verge of bankruptcy due to the financial services arm coined GE Capital. During that time period, GE Capital and their Consumer Finance unit played a huge role in the company’s 38% topline decrease. Following that near-death experience, GE decided to reduce their dependence on the capital arm and investments in GE Capital were steadily cut.
These days, GE has shifted their priorities and has been increasingly focusing on industrial businesses and technological improvements within the Energy sector. Currently, industrial businesses across all arms of the business generate nearly 55% of the company’s earnings.
Year to Date
Since the beginning of the year, GE stock has fell 5.3% while the S&P 500 has increased by 4.3%. If we take a longer time period, from the start of 2013, GE’s stock has gained only 26.5% while the S&P has increased by 35.2%. Even though GE is underperforming the market, it is generating great cash flow and returning value to shareholders via dividend payments.
General Electric’s valuation metrics are good, but not great. The forward P/E is failry low at 14.59, but the Enterprise Value/EBITDA ratio is high at 22.60. Even their debt to equity is very high at 2.89. It is by no means a bargain, but has shown great earnings growth prospects and the ability to quickly add some diversification to your portfolio.
On April 17th GE reported first quarter results and beat street EPS expectations by $0.01 (3.10%). But, they did miss revenue expectations with $34.2 billion which was down 2% from same quarter last year. Not a great quarter by any means, hence GE underperforming the general market in past quarters. But, the diversifying revenue streams away from their financial services and back to industrial operations does bode well for future earnings growth potential.
GE boasts a dividend yield of 3.28% which is above the industry average and that of the S&P 500. GE did cut their dividend payments in 2009 and 20019 as a result of the financial crisis, but has increased them consistently starting again in 2011. These increases equate to a 18.2% annual dividend growth rate over the past 3 years.
With a 14.59 P/E ratio and 3.28% dividend yield, I believe GE to be fairly valued. Given the scarcity of quality divided champions available at attractive values, I initiated a position in GE on 6/5/2014 by purchasing 40 shares at a value of $26.78. From a long term investing perspective, I believe the potential earnings growth from reallocation of investments and the potential from emerging markets will place GE in a very advantageous position moving forward.
Full Disclosure: Long GE