There's always a core of companies that virtually every broker will recommend, from the FANG stocks to a few large drug companies to some utilities. General Electric (GE) used to one such name, but then it lost some 75% since peaking in 2000 at more than $60 a share. With the stock down to about $12.90 despite a 3.8% dividend yield, should income investors buy?
Let's check it out:
A Company in Transition
General Electric is the third-largest of 70 major U.S. industrial-machinery companies, with about a $112 billion market capitalization. The firm once manufactured a long list of very boring products -- jet engines, power-plant equipment, etc. It seemed as though the list of markets that GE wasn't in was shorter than the list of those it was.
But ultimately, GE became too big of a company with too diverse a portfolio of products, and the stock underperformed. Although General Electric shares traded in the $30s as recently as April 2017, the stock sold off sharply later that year and has recently fetched between about $12 and $15 per share.
However, new CEO John Flannery took over a year ago, launching a massive restructuring. He wants GE to become a premiere high-tech industrial company by focusing on just three areas -- aviation (including services engines and military applications), power (including gas power and services) and renewables (wind power). The company is selling or spinning off other businesses, decentralizing decision-making and aligning management incentives with each segment's individual performance.
General Electric doesn't have a trailing-twelve-month price-to-earnings ratio because the firm recently posted a loss. But its forward P/E of about 12.5x makes GE the 10th-cheapest stock in its sector.
The firm is also re-engineering its balance sheet, cutting debt by $113 billion between 2013 and 2017. Additionally, General Electric refinanced $129 billion of debt over the past five years, lowering annual interest payments to $4.8 billion last year from $10 billion in 2013.
The Downside of Downsizing
Unfortunately, big changes come with big costs. For instance, GE's revenue has also understandably taken a hit, with gross revenues falling from $142 billion in 2013 to $120 billion in 2017.
Margins have also compressed over the past five years -- but because the company is in the middle of huge changes, it's impossible to say yet whether that's the "new normal" or just temporary.
A Good Dividend (For Now)
Despite all of these changes, General Electric still has a great cash-flow statement. The company has continued to earn sufficient cash from ongoing operations to pay for current investments, providing the financial flexibility needed to restructure its debt and balance sheet.
GE has also managed to pay out $43.4 billion in dividends to shareholders since 2013, but current and potential GE investors have one big question: "Will the company cut its dividend?" My opinion is a solid no, for this reason -- if the firm was going to cut its dividend, it would have already done so.
After all, GE has been paying down debt and restructuring its balance sheet for the past few years. Money that went to shareholders in the form of dividends sure would have helped with that, but the company chose to continue to paying shareholders instead. In fact, General Electric's 50% payout ratio tells me that the company has the wherewithal to raise its quarterly payout if management wants to.
The Bottom Line
So, is this the time to buy General Electric?
Purely from a valuation level, the answer is yes. It's trading near a multiyear low, and it's very cheap on a forward-P/E basis.
That's not to say that GE isn't without risk, given that management is attempting one of the largest corporate restructurings in modern history. However, I work under the assumption that most company managements are both very qualified and sufficiently incentivized to do everything they can to help their employers grow.
Add it all up and I think GE is a good buy here as a long-term holding of one year or more.
(This article was originally sent Aug. 29 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Hale Stewart, Jonathan Heller and others.)