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Using the Value Line Page: General Electric Trying to Rebuild Trust - July 29, 2011
Often, the most hurtful thing about infidelity isn’t just that one partner strayed; it is that one partner in a relation betrayed the trust of the other. That level of trust is very hard, if not impossible, to regain. Although it may seem a stretch to compare infidelity to stock investing, prior to the start of the 2007-2009 recession, General Electric (GE – Free Value Line Research Report for General Electric) had been the proverbial widows and orphans stock. It was something that your grandparents could proudly say they owned.
True, as the Graph on the Value Line report shows, the company’s share price had been in something of a malaise since the 2001 recession, but the company’s performance under Jack Welch gave shareholders a reason to sit tight. This was particularly true since Jeffery Immelt was hand picked to take the CEO reins when Welch retired.
Some on Wall Street had warned for years that the company’s growing finance arm had become too big and unwieldy, that its performance was too large a driver of the company’s overall results. However, so long as the finance arm prospered, few took the long-term threat seriously. That was, of course, until 2008 when that unit’s performance unraveled and took the rest of the company, and its reputation, with it.
The fall from grace is clearly evident in the Graph by the fall from the $40 per share level in late 2007 to a low of about $6 in early 2009. (A stock’s high and low for the year are listed above the Graph.) Earnings declining from $2.20 per share in 2007 to just $1.03 in 2009, as noted in the historical portion of the Statistical Array, is another clear indicator. But, perhaps, the most notable was the company’s decision to cut its dividend from $0.31 a share per quarter to just $0.10. This was the change that truly destroyed trust for long-term shareholders.
That cut took place in the third quarter of 2009, as shown in the Quarterly Dividend box. The company has been working diligently ever since to gain back what it has lost. However, it has not been easy going and, based on a still-languishing stock price, the company hasn’t yet convinced investors that it has changed enough.
That said, as the Quarterly Dividend box shows, the company has resumed dividend increases, with three boosts in less than a year. Still, the current run rate of $0.60 a share per year is a far cry from the $1.24 that was paid in calendar 2008 and is still less than the full-year dividend payment made some 10 years ago. Business has been improving and the company has put forth a vision for the future, which includes focusing on several core initiatives, such as green technology.
Still, the sting of the past is hard for investors to ignore. Moreover, the finance arm is still a major determinant of the company’s overall success. A slowly improving economy has led to improved performance at this division, but the lingering fear is that any new troubles here could sink results, again. That fear isn’t unfounded, particularly in light of the weak pace of the current recovery and the partisan bickering that has put the country’s financial underpinnings, including its top-rated debt grade, in question.
There are, however, some things to like about General Electric stock. For one, at recent prices, the stock hasn’t been as “cheap” relative to the broader market in over 15 years, save for a short period during the depths of the recent recession. Indeed, the Relative P/E of 0.85, which can be found in the Top Label, is even lower than the Average Annual P/E in 2009 (found in the Statistical Array), when the company was earning less per share than it did in 2010 and what Analyst Damon Churchwell estimates it will earn in 2011.
In fact, Churchwell’s longer-term projections call for annual earnings advances of about 12.5% per year out three to five years. (This figure can be found in the Annual Rates box.) His projections include an increase in the Relative P/E to 1.00, which would still be on the low side historically for this company. (The projected Relative P/E can be found, in bold, to the right of the row heading in the Statistical Array.) This leads to a projected price range of $30 to $50 per share. Taking into account dividends, which Churchwell expects the company to continue to increase, and there is the potential for 17% to 31% annualized returns over the three- to five-year period.
So, while there are material risks, there is the potential for material reward, as well. That said, General Electric stock is no longer the type of investment that one can make and forget about. Management has proven it doesn’t deserve that level of trust—at least not yet. However, for slightly more aggressive investors willing to keep an eye on their holdings, GE stock might be worth consideration.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.