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General Electric (GE) is a long term core holding in my income portfolio. I have been impressed on how focused the company has been in becoming more of a pure play industrial giant by continuing to reduce the financial footprint by paring back its finance arm. The company reportedly intends to spin off the U.S. consumer-lending operations of GE Capital. This could take place early next year via an IPO. This unit provides credit cards and financing to 55M people at major retailers, including Wal-Mart (WMT) and Banana Republic. GE also sold $2.7B in real estate that GE Capital held to Blackstone earlier in the month.

Also this week, the American multinational announced it is taking a 15% stake in China's XD Electric Group for $552.2M. This Chinese company produces high-voltage transformers, circuit breakers and capacitors. This new partnership will help GE double sales of power transmission products in the digital energy business to $4B over the next 10 years.

These two events continue an effort over the past few years that has helped GE increase the contribution from its industrial businesses while continue to reduce its non-core financial businesses. There are several advantages to the company and shareholders by this transformation.

  • Investors should award GE a higher multiple as it becomes more of an industrial pure play.
  • The company is becoming a less complex enterprise to operate.
  • It decreases the amount of leverage on the company's balance sheet.
  • This greatly reduces the regulatory target on GE's back as it continues to reduce its financial footprint.

Valuation:

I am looking forward to the company's continuing transformation as I think it will unlock significant shareholder value. It should also help the company to continue to grow in emerging markets where it should benefit greatly from long term demand for some of its large ticket product lines (Ex, Jet Engines).

As it is the stock is a solid value. The shares yield 3.2% and the company has raised its payout by 90% since coming out of the financial crisis. Another dividend hike should be announced by the end of the year. The stock is not expensive at less than 13x forward earnings and ~8x operating cash flow. BUY

Source: General Electric's Transformation Continues On Track