In my previous article, I wrote the reasons on why I was selling General Electric (GE) while comparing it to some of its peers but still maintaining GE on my watch list. About two months later, I'm deciding to jump back into the stock as a dividend play, as opposed to capital appreciation.
Since selling the stock back when it was at $23.60 it has tumbled nearly 7.8% and with good reason. Just on 19 Apr13, before the market opened, GE reported quarterly earnings that met expectations, however, the selloff came as CEO Jeff Immelt said GE was going to try to boost earnings by cutting the fat at the company to the tune of $1 billion as opposed to relying on revenue growth which generally indicates tough times ahead for the company. As for the earnings itself, Q1 EPS was $0.39 beating the average consensus estimate by $0.04 while revenue came in at $35.0 billion with the average consensus estimate at $34.7 billion.
GE currently trades at a trailing twelve month P/E ratio of 15.7 which doesn't bother me too much because I like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-yr forward-looking P/E ratio at 11.76 is inexpensive to me. If all holds true and there aren't any earnings revisions from the company within the coming year, I believe the stock can go to $27.75 for a 27.6% gain before I can consider the stock rich for my blood. But there seem to be macroeconomic headwinds approaching which will making that 1-yr forward P/E of 15 difficult to attain. The PEG ratio which measures the ratio of the price you're currently paying for the trailing twelve month earnings on the stock while dividing it into the earnings growth of the company for a specified amount of time (I like looking at a 5-yr horizon) does not tell me GE is inexpensive or rich with a value of 1.4. The following table shows the stock indeed has gotten inexpensive from two months ago.
The premise of why I'm purchasing the stock right now is the dividend. The dividend is roughly the same from when I sold it but the stock price is a bit cheaper. As I wrote previously, I figured GE would purchase somebody and I figured it would get cheaper on a big purchase but that wasn't really the case when GE ended up purchasing Lufkin (LUFK). After all, it is traditional for the acquiring company to drop in price after making a major buyout of another company. Instead the price got cheaper on the words of the CEO saying future earnings would be met by cutting the fat at the company rather than revenue growth. The 4% drubbing GE took on 19Apr13 is standard for the rhetoric which was spoken by the CEO and I believe the stock will go down further only if the market itself goes down further. Other than that, I believe the stock will teeter around these levels or move up ever so slowly because I believe the 3.5% dividend yield provides good support. If the market does indeed go down at any point, I will definitely be buying the dips in GE.
On technicals, the first thing I see is that the stock has hit oversold territory on the relative strength index with a value of 30.72. Typically, values of 30 or less indicate oversold territory, but with the downward trajectory on the chart, I'd expect it to consolidate within the next couple of days before making a move higher. The Moving Average Convergence-Divergence (MACD) chart shows the momentum to be negative with maybe a little bit more of downward movement to go. The stock chart itself shows that it has broken all technical support levels except the 200-day moving average. The chart shows the 200-day MA has acted as support twice; once back in mid-November 2012, again at the end of December 2012, and I would look for it to act as support once again. If the stock does break below the 200-day MA, I'd look for the next floor of support to be around $21 (at which point GE will yield 3.6%).
From a valuation perspective the stock looks cheap while the dividend yield provides good support at these levels. When GE first cut its dividend on 18Jun09, the yield support at that time was around 3.3% and has always been yielding lower from that point until today and that's why at these levels I believe it's good support for the stock. The immediate term macroeconomics provide for a little bit of fear but with the stock already in oversold territory, I don't see it going much lower. I certainly would rather collect the 3.5% yield right now in an excellent company than my capital for 5 years in a 1.85% yield certificate of deposit at the bank. If you don't have the stomach to handle some near-term volatility wait and see what happens with the 200-day MA support level.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!