Many investors seem to be wildly bullish about General Electric Company (NYSE:GE) shares. This seems to be due to the image it has had for a long time as one of America's largest companies and because many investors view it as a "blue chip" stock. One Seeking Alpha contributor even recently called it "my 2013 stock pick of the year," and suggested that GE shares could double in value in 12 to 18 months. While this author should be congratulated for calling GE a buy at much lower levels in the past, I think the upside is limited from here. It might be a suitable holding for some investors, but it hardly appears poised to be a top stock pick at these levels unless you are happy settling for very average returns.
No doubt, it is a fine company, but if you get beyond the image and just look purely at some numbers and the recent history of the stock, it might be tougher to get so excited. Plus, due to the size of this company and its global reach, you might be better off just picking an exchange traded fund or mutual fund that will give you the diversification and eliminate the company specific risks that can come with owning individual stocks. Let's not forget that in the aftermath of the financial crisis, General Electric was hardly a pillar of strength and it turned into a single digit stock rather quickly. Buying at that time was a great idea, but buying at current levels is not likely to do much more than keep pace with the market averages.
General Electric is operating in a wide range of industries which include energy, aviation, finance and others. It is also operating all around the world. It is a very large company and that means the law of large numbers makes it hard to move the needle. That's why I think of General Electric as more of a mutual fund or ETF and it's also why I don't believe it can deliver returns that will be much above the market averages. It might see growth in one part of the world, or in a certain sector. However, another part of the world might be seeing less growth or a certain industry it operates in might be facing headwinds. That means there are so many moving parts that it is (once again), tough to move the needle. If you want to have widespread diversification in terms of industry and geography, it might make more sense to sell GE shares so that you avoid the risks that are inherent in owning a single stock and buy a mutual fund or ETF.
In my view, General Electric has too much leverage with the balance sheet. It has about $125.7 billion in cash (which is great), but it has around $414 billion in debt (really not great). That is a very large debt load, especially for a company with around $147 million in annual revenues. This debt load is probably a major reason why the stock sank so much during the financial crisis. While debt might be manageable in a strong economy, it can be a real burden when things get ugly. Debt increases risks for shareholders, and that is why it makes sense to invest in cash-rich companies with little to no debt, when picking individual stocks for long-term investing.
When looking at a few valuation metrics, General Electric is just about average in many respects, and does not appear undervalued. Analysts expect the company to earn $1.67 in 2013. That puts the price to earnings ratio at around 14 times, which is very similar to the average PE ratio for the S&P 500 Index (NYSEARCA:SPY). GE's book value is around $11.74 per share, which means it is trading for about twice the book value. Once again, this is similar to the average for the S&P 500 Index. With a 3.4% dividend yield, it does yield more than the just over 2% average for that index. However, that is because General Electric pays out about 76 cents per year or nearly half of what it earns. This means the payout ratio is close to 50%, and that could limit dividend growth in the future. By contrast, another major U.S. company, Exxon Mobil (NYSE:XOM), pays a $2.28 per share dividend which yields about 2.5%, but analysts expect it to earn about $8 per share. That puts the payout ratio at less than 30%, which means it might have a much higher dividend growth rate in the future.
I view General Electric as a proxy for the economy, and while there have been some positive signs in the housing and jobs market, much of the "rebound" we have seen is due to government stimulus, continued spending of borrowed money which is not sustainable and low interest rates and money printing by central banks. While the United States avoided the Fiscal Cliff for now, the debt ceiling debate, sequestration and major spending cuts still loom large. As I recently warned, major spending cuts and tax increases will probably come sooner or later and that could cause another market correction and possibly a recession.
As a major industrial and financial company, General Electric is likely to feel the impact of spending cuts and of any resulting recession. For this reason, and because I view General Electric as being too large to significantly outperform the market, I can't support buying this stock now. In fact, it seems like the perfect stock to sell which would allow investors to put that money in a fund, thereby eliminating individual stock risk. For example, the S&P 500 Index could provide upside in the event of global growth, plus dividend income, and much less risk. But I would wait for the markets to drop before considering major new positions.
Key Data Points For General Electric From Yahoo Finance:
Current Share Price: $22.54
52-Week Range: $18.02 to $23.18
Dividend: 76 cents per share which yields 3.4%
2012 Earnings Estimate: $1.67 per share
2013 Earnings Estimate: $1.84 per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.