General Electric (GE, Financial) stock has an attractive dividend yield of 3.5%. Despite such good returns investors have been found selling their stake in the company. General Electric has a diversified business that offers a wide range of products and services from aircraft engines, health care, transportation, to household appliances, business and consumer lending. However, investors’ were shaken during the 2008 financial crises when the company’s stock crashed owing to its exposure to the financial lending business. But what is it that’s making investors wary about the industrial conglomerate? Should investors keep faith in the company or keep away from the stock? Let’s take a brief look at the company to know if it’s worth consideration.
What’s concerning investors?
Several research firms have downgraded GE stocks. Ladenburg Thalmann analysts lowered their rating in a research report from a “buy” to a “hold”. Analysts at JPMorgan Chase have given a “neutral” rating on the stock, and lowered the target price from $26 to $25. In contrast, analysts at Vetr upgraded their rating from a “buy” to a “strong buy”, suggesting that GE’s strategic moves should prove beneficial for the company going forward.
In the latest earnings release in January, General Electric recorded an earnings per share (EPS) of $0.56, thrashing analyst estimates. For comparison, the company had recorded and EPS of $0.53 in the year ago quarter. The American conglomerate’s revenue rose 4% to $42 billion for the period. Analysts estimate the company to register an EPS of $1.73 in the current fiscal year. General Electric stock has underperformed and fallen out of favor since the recession. Stock prices have increased 56% in the last five years, which is the lowest when compared with Honeywell’s (HON, Financial) 145.5% and United Technologies’ (UTX, Financial) 68.78%. It seems like CEO Jeff Immelt’s decision to cut dividend in 2009 and slow earnings growth are still weighing on the stock.
Can GE’s regain investor confidence and grow its returns in the future?
On a growth trajectory
Jeff Immelt is presently concentrating on reducing GE’s exposure to the finance arm by increasing focus on the industrial segment. Investors are more comfortable with the industrial business than the financial segment as this would guard GE against future financial shocks.
General Electric is working toward achieving a 75:25 ratio between its industrial and financial arm by 2016. The company is trimming the banking business while expanding into water and power, aviation, and energy that have tremendous scope in the future. The company is well positioned and has strong presence all over the globe through alliances, partnerships and collaboration with its supply chain.
Data taken from Morningstar
The company also has a good history of paying regular dividends. In the past decade GE has also consistently increased its dividend payment barring 2009 and 2010 when the company was badly hit by the financial meltdown. Now as the company is shifting its business mix more toward its industrial operations, earnings are expected to grow steadily. This provides an opportunity for both income and growth investors. Contracting the banking business would bear an impact on the company’s bottom line in the short run, but it would have its share of benefits in the long run when the company will have limited exposure to the fluctuations in the banking industry. GE would carry its lending operations on a smaller scale by offering finance on selected segments that would support its industrial operations,
Besides, GE is making a conscious effort of growing its industrial base in those sectors that have solid prospects. It’s investing in the global power generation sector as it sees tremendous demand in this space. The company is also expanding in the aviation segment which has huge upside potential as demand for airplanes is increasing at a good pace. Low oil price is boosting airlines profits. These profits are being utilized for aircraft purchases, which means more orders for GE engines. The company already has a solid order backlog that’s going to generate revenue for several years.
The company is poised to grow in future. General Electric long term prospects look quite bright, making it an attractive investment option worth consideration.
