Seeking Alpha
Long only, dividend investing, dividend growth investing
Profile| Send Message|
( followers)  

Introduction:

General Electric (NYSE:GE) was a model example, during the great recession, of the perils that a company assumes upon itself when it expands beyond its core business. GE saw their revenue fall from 181 billion dollars in 2008 to 159 billion in 2009; likewise their profit also fell from $1.78 per share in 2008 to $1.03 in 2009. For that reason, GE has made efforts the last 2 years to focus on their core business. This refocus has enabled GE to begin to return value to its investors.

200820092012
Revenue$180.93 B$155.78 B$144.8 B
Profit$18.09 B$11.22 B$14.68 B
EPS$1.78$1.03$1.29
Annual Dividend$1.24$0.40$0.68

Note: The annualized dividend for GE as of the beginning of 2013 is $0.76

As you can see the slimming of their business model has enabled GE to reclaim the profit margins it once had. While refocusing they have shed portions of their company that do not align with the future path of the company. The finalized sale of GE's remaining stake of NBC Universal is an example of this action. There are a few other actions that GE has taken recently to further stabilize their restructured business model that I would like to highlight.

  1. Sale of NBC Universal: GE agreed to terms with Comcast to purchase GE's remaining 49% stake in NBC Universal a year or two ahead of schedule. This sale will be completed for a grand total of 16.7 billion dollars for NBC universal itself. As part of the deal GE Capital will also sell real estate associated with NBC for a total of 1.4 billion dollars.
  2. Share Repurchase Plan: The sale of NBC enabled GE to increase the amount of money committed to their share repurchase plan. The new amount committed to the repurchase plan totals 35 billion dollars. Currently around 23 billion dollars remain on their share repurchase plan. Based on GE's closing price of $23.72 on 2/19/2013 the remaining repurchase plan represents almost 10 percent of the existing outstanding shares.
  3. Increasing Dividend: GE was forced to cut its dividend from $0.31 per share in 2009 to $0.10. The recession forced GE to make this dividend cut. Since that cut, GE has made great progress in increasing its dividend. It just announced a dividend payment increase that raises the quarterly dividend to $0.19 per share.
  4. Share Price Appreciation: GE's share price bottomed out in February of 2009 at a paltry $8.51 per share. Since that time GE's refocus efforts have helped the stock price rise an impressive 278% in a 4 year time frame. GE's latest closing price was $23.72 on 2/19/2013.
  5. GE Capital: In the latest quarter GE Capital's earnings grew 9%, and the Commercial Real Estate arm grew net income to $0.8 billion while shrinking assets by $15 billion. Streamlining and focusing their efforts has turned GE's financing division into a profitable line item while at the same time shrinking its overall balance sheet.

Company Refocused:

GE's management team realized during the recession that it had overextended itself and lost sight of its primary purpose. During this time they began to take measures to redefine GE as a company and return to their roots. Recognizing their mistakes helped management guide this company to rebound quicker than if they would have ignored these mistakes. Management has proven the ability to correct mistakes and should be given much of the credit for GE's turnaround. GE's footing today is more stable than it was at this time 4 years ago.

4Q/Year End Earnings Summary:

Here are some of the highlights for GE's latest quarterly and year end report.

  • 4Q Operating EPS of $0.44 up 13% Full-year operating EPS of $1.52 up 16% (up 10% excluding effects of 3Q'11 preferred stock redemption)

  • 4Q Continuing EPS of $0.41 up 11% Full-year continuing EPS of $1.39, up 12%

  • Second consecutive quarter with all Industrial segments reporting positive earnings growth

  • Double-digit earnings growth for five of seven Industrial segments

  • 4Q orders up 7% ex. Wind and FX growth region orders up 12%

  • Margins up 120 bps over prior year period increases in all seven Industrial segments

  • GE Capital earned $1.8 billion in 4Q up 9%

Summary:

Management realized the error of their ways and steered the company down a more focused and sustainable path. This refocus has made GE a company worth investing in. GE is poised for a significant upswing in the coming years. The repurchase plan alone should add 10% to the company's value based upon the forward moving P/E average. Many times strong bull markets, like the one we have been experiencing, can lead to overvalued stocks. GE is a buy at current levels regardless of where the broader market stands. Let me know what you think of GE's decision to redefine the company's focus.

Source: GE Refocusing For Success