General Electric: On The Road To Recovery?

Apr.11.13 | About: General Electric (GE)

The financial crisis of 2008 and 2009 sent a lot of companies reeling. But few felt the impact as much as General Electric (NYSE:GE).

From the fall of 2007 to the beginning of 2009, GE shares tanked from above $40 to below $10. The company had to slice its dividend in response to the crisis.

Now, roughly five years later, signs point to GE being recovered, ready to reward investors once again.

General Electric gives investors a sense of diversity, in that the company's reach spans into more than a dozen industries, including home appliances, healthcare, aviation, energy and financing. GE also provides geographic diversity, with a presence in 160 countries.

The Trouble With GE Capital

GE's downfall during the financial crisis had little to do with its industrial businesses or its international operations. It was almost entirely due to GE Capital. For years, GE could count on its finance unit to provide earnings when other divisions were on a down cycle. But because of GE Capital's size at the time of the financial crisis -- its asset base equaled that of the of the sixth-largest U.S. bank -- it became lumped in with Wall Street banks and finance companies. And because GE Capital accounted for about half of the overall company's earnings, investors punished the company.

And what may give some potential investors pause is that the size of GE Capital relative to the overall company hasn't changed much. In 2012, GE Capital contributed $7.4 billion of GE's $16 billion operating earnings. Since its earnings release in mid January, reports have surfaced that the parent company may be looking to spin off the finance unit, though the company claims that is not the case.

Overall, GE had a strong year in 2012. Operating earnings were $16.1 billion, up 8%, from $14.9 billion in 2011, and operating earnings per share were $1.52, up 16%.

The fourth quarter marked the 11th consecutive quarter of strong operating earnings growth for the company, as the operating earnings of $4.7 billion were a 13% increase over the previous year's fourth quarter. Revenue was $39.3 billion for the quarter, up 4%, and $147.4 billion for the year. Industrial segment organic revenue growth was 4% for the quarter and 8% for the year.

The fourth quarter was also the second consecutive quarter with all Industrial segments reporting positive earnings growth, with double-digit growth in five of its seven segments. Cash generated from GE operating activities rose 48% to $17.8 billion for the year. GE ended the quarter with $77 billion of consolidated cash and cash equivalents.

GE Capital had earnings from continuing operations of $7.401 billion in 2012, increasing from $6.584 billion the previous year. GE Capital's liquidity has strengthened considerably. The finance unit's ratio of debt to equity was 4.85 to 1 at the end of 2012, compared with a ratio of 9.62 to 1, at the end of 2008.

The company repurchased $5.2 billion worth of common shares in 2012, and raised the quarterly dividend by $0.02 to the current payout of $0.19, for a current yield of 3.30%. However, a current payout ratio of 50% limits future dividend growth, minus earnings growth.

Average analyst expectations for GE's earnings per share are $1.67 for 2013 and $1.85 for 2014. If the payout remains around 50%, the dividend could reach $0.92 by next year.

Stock Price on the Rebound

Shares of GE hit a 52-week high of $23.90 on March 8, and have since settled in around $23. The stock has returned nearly 13% year-to-date, though it's nowhere near the $60 a share the company was valued at in the early 2000s and the $40 range before the financial crisis. GE has a price-to-earnings ratio of 16.8.

Of the company's 16 analysts, four rate the stock as a strong buy, seven as a buy and 5 as a hold.

In the company's 2012 annual report, CEO Jeff Immelt outlines five core strategies to "drive the future" of GE:

  • Remaking GE as an infrastructure leader: "About $60 trillion of infrastructure investment is needed by 2030 to support billions of new consumers joining the middle class in the emerging world, and to support developed-market productivity. At $100 billion of revenue with 15% margins, we are the largest and most profitable infrastructure company in the world."
  • Balanced capital allocation with a focus on dividend growth: "We like GE to have a high dividend yield, which is appealing to the majority of our investors…In total, we plan to return $18 billion to investors this year through dividend and buyback."
  • Investment in organic growth: "We believe that investing in technology and globalization is key to gaining market share. Annually, we invest more than $10 billion to launch new products and build global capability."
  • Alignment with customer outcomes: "Our growth is aligned with customer outcomes, and our products improve their productivity…We only win when our customers win."
  • Leading the big productivity drivers of the era: Immelt writes that GE is positioned to lead in three key productivity themes: "the shale gas revolution," the rise of advanced manufacturing technologies, and the power of the Industrial Internet to increase productivity through better analytics.

The company has also been able to sharpen its focus by divesting its remaining share of NBCUniversal.

GE still has some residual effect from the financial crisis. Most glaring is its debt, which at more than $467 billion is three times the company's equity. Last year GE returned just 11.3% on that equity, and got minimal returns on its asset base (2%) and investments (3.9%).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.

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