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About 8 years ago a relative turned over management of his investment account to me. As I looked over the account, I saw that nearly 1/3 of the portfolio was invested in General Electric (NYSE:GE) stock. Without much consideration, I immediately sold 80% of those shares in order to diversify the portfolio and not because I was prescient about the future of GE. The relative was very upset that I sold them because he considered this his core holding and it had done well for him throughout the years he held it. However, 3 years later he was very thankful I sold them because the value of GE fell over 70% and the dividend was cut by 67%. This move saved him thousands of dollars.

At that time GE was hardly making any money on its manufacturing and was highly dependent on its profits from its banking and financial segment. When the housing debacle hit financial companies a few years ago, GE was hit with the same problems every other financial institution encountered. Hence the profitability of GE went into a tailspin and GE was forced to make some hard decisions about the whole of its business enterprise. The graph below shows the swoon in both the dividend and stock price in 2008. (Taken from Interactive Brokers)

(click to enlarge)

The graph also shows the gradual increase in price and the continuing growth of the dividend since 2009. The question: Is GE once again a stock one should have as a core holding in one's dividend growth portfolio? To answer the question I took a look at some recent numbers offered by the company.

Earnings And Dividend Report January 2013

GE is involved in many industrial segments. The company breaks its industrial business down into seven components. The chart below lists the components and the profit and revenue increases from 2011 to 2012.

Type of Business

Profit Difference from 2011

Revenue Difference from 2011

Power and Water

+5%

+10%

Oil and Gas

+14%

+12%

Energy Management

+36%

+15%

Aviation

+22%

+6%

Healthcare

+7%

+1%

Transportation

+12%

+15

Home & Business Solutions

-

+4%

Besides the industrial components GE also owns GE Capital. GE Capital had a 6% revenue decline year over year, but a profit increase of 9% year over year.

These positive numbers indicate that GE is growing both revenue and profits at an excellent rate, especially in view of the size of the company. GE also shows an increasing backlog of orders at the end of the year. See the graph below:

GE pays a 3.4% dividend or $0.76 per share. It has also bought back $5.2 billion worth of stock this past year. The P/E of the company is around 17. These represent reasonable numbers for a major growing company.

Independent Ratings

Several rating companies are calling GE a buy. Credit Suisse rates GE an outperform. The Street rates It a buy. S&P gives GE 4 stars which means it rates a buy. S&P further states that it expects GE to increase its profit margins in 2013 with an EPS estimate of $1.65 per share. This is still a long way off from the $2.20 per share the company earned in 2007, but it quite a bit better than the $1.03 it earned in 2009. Ford Equity Research rates GE a hold. It projects that the stock price will move in line with the market over the next year.

Major Concern

With all of this good news, one would conclude that GE should again be a core holding in a dividend growth portfolio. However I have a lingering concern over the reduction in cash flow from operating activities. The box below was taken directly from GE's press release for the final quarter of the year.

(click to enlarge)

If revenues and profits are growing in the industrial segments of the business, why is cash flow decreasing by 5%? The reason for the reduction in cash flow is never stated in the quarterly report. There may be proper and good reasons for this drop in cash flow, but my perusal of the report did not reassure me.

This is all the more troubling considering GE's past with GECC. I am convinced although I can't prove it, that the company used GECC to create a false sense of momentum in sales and profits for the company in the past. The picture above indicates this a possibility again. GECC leases all kinds of equipment all over the world which allows the industrial segments of the company to sell its wares to GECC. While there is value in handling financing internally, it also makes it possible to manipulate sales and profits by selling to its leasing division.

Conclusion

I left several hundred shares in my relative's account after selling most of his holdings long ago. I continue to hold them but have decided not to make it a core holding at the present time. I will continue to watch GE's growth and cash flow numbers for a few more quarters before making it a core holding once more. I have added several hundred shares of the company to my personal account as well. GE's reasonable dividend and current earnings growth make this an investment to watch carefully to see if it again can become a general worth leading a dividend growth portfolio to success.

Source: General Electric: Is This General Ready To Lead Again?