It might be tough for some investors to continue allocating fresh capital in a hot stock market, but I continue to scan for attractive opportunities and make purchases that make sense for me. The S&P 500 sets new records seemingly daily lately, but I have my own records to worry about: Namely, I want to break new dividend income records as often as possible. I can't attain financial independence and pay for all of my expenses via dividend income if I let fear paralyze me.
I discussed some equities on my watch list for this month, and I was as honest as I could be in terms of what I was looking at and why. After reviewing this list a few times and really scanning over the opportunities I saw in front of me, I finally decided to settle on one company in particular. I purchased 60 shares of General Electric Company (NYSE:GE) on 3/10/14 for $25.94 per share.
General Electric is a diversified energy infrastructure, financial services, and industrial products company. They serve customers in more than 100 countries. They operate in eight segments: Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions, and GE Capital.
I initiated a position with this company in June of last year, and I'm a happy shareholder thus far. Management has been crystal clear in its plans, and has so far executed.
The backlog ended at a record $244 billion at the end of 2013. That's a lot of work cut out for the company, and I look forward to seeing orders filled while GE continues to sign new contracts. They're incredibly diversified not only in their business segments, but also in geographical markets. Revenues for GE now exceed $1 billion in 24 countries. The fantastic thing about GE is their breadth and scale. Through their various segments the company manufactures diverse products like wind turbines, water treatment equipment, jet engines, subsea drilling and production systems, locomotives, medical imaging products, and consumer appliances, among many, many other products. It's really a global powerhouse of a company.
GE continues to move closer to its core businesses and away from the riskier financial services arm in GE Capital - which shook the company to its core during the height of the Great Recession. By 2015, GE aims to have GE Capital contribute only 30% of earnings to the company. As part of that objective, GE plans to spin off a major portion of GE Capital by way of the credit card and retail lending business. Later this year they will offer up to 20% equity in the business through an IPO, and the remaining 80% of the business will be spun off to shareholders sometime in 2015. This is a great move, as it allows GE to focus on manufacturing the major products that it specializes in, while also allowing GE Capital to serve the purpose it's meant for: Commercial financing for the middle markets that purchase its core products.
GE's growth profile over the last 10 years paints a mixed bag. They have seen massive growth running up to the Great Recession due to leveraging in their finance arm, but the aforementioned shrinking of this segment has led to reduced earnings. GE is making some plays for the long haul, but in the meanwhile certain metrics may lag. It's not to be taken lightly that they're reducing GE Capital, as this is a major part of the business. At one time it made up about half of the business based on net income. So by shrinking GE Capital, management is also shrinking GE as a company. But they're doing so to better focus on the plethora of products they specialize in, and this is where the future of GE lies.
Revenue was $152.4 billion in 2004, and finished at $145.7 billion in 2013. That's a compound annual growth rate of -0.49%. Yes, negative. EPS was $1.59 in 2004 and $1.47 in 2013. That's a CAGR of -0.87%. Again, negative. But, luckily, I wasn't invested in GE back in 2004. And, of course, we don't invest in the past. When investing we must look at what the company is doing to propel growth going forward, and I think GE has the right mix of products, assets, and plans to grow and be an even better company in the future. EPS has been growing solidly after bottoming out at $1.03 in 2009, and I think that growth is set to continue. S&P Capital IQ predicts an EPS CAGR of 7% over the next three years.
Dividend growth also paints a mixed bag. After years of being a dividend titan and raising dividends for 32 consecutive years, GE was forced to cut the quarterly dividend back in 2009 by 68% from $0.31 per share to $0.10. Of course, this cut came after management insistence that the dividend was safe when it really was not. The good thing is that the problems (GE Capital's leverage and exposure to retail lending) that led to the cut have been addressed, and GE is making active changes to strengthen the business going forward.
Since the dividend cut, GE has raised its dividend six times - the most recent raise being 15.8%. The company now pays out $0.22 quarterly per share and yields 3.38% at today's price. The payout ratio stands at 59.5%, so I anticipate a nice dividend raise later this year. For perspective, GE returned $18.2 billion to shareholders via dividends and share buybacks in 2013.
The balance sheet has improved substantially over the last few years as GE continues to reduce leverage at GE Capital. The debt/equity ratio now stands at 170%, and the interest coverage ratio is 2.6. The balance sheet still needs improvement, and this is something that GE continues to work on.
GE believes infrastructure spending will reach $60 trillion by 2030, in part to support a growing worldwide population and rising global middle class consumer. GE aims to capitalize on this by grabbing a large part of this spending, and as the world's largest and most profitable infrastructure company they're well positioned.
Of course, there are risks with GE. Their plan to continue growing the infrastructure and industrial side of the business could falter based on global economic slowdowns. In addition, although GE Capital is planned to only be about 30% of the business by 2015, that's still a significant portion of the business with certain regulatory and capital risks of its own. Competition is always a risk as well, especially if GE cannot execute key strategies.
I think by investing in GE I'm making a bet on U.S. and global growth continuing for the foreseeable future. There is no doubt that there will be more people on this planet 10, 20, and 30 years from now. And more people requires more infrastructure, energy, transportation, etc. GE bills itself as a company that allows the world to work better. And I like my chances in betting on the world being a bigger, better, and brighter place decades from now.
GE currently trades hands for a P/E ratio of 17.63. I valued the company using a Dividend Discount Model analysis with a 10% discount rate and a 7% long-term growth rate. This gives me a fair value on shares of $31.39. Overall, I'd say shares here are attractive with possibly a small margin of safety, assuming management can continue to execute and the company's core portfolio can overcome the losses from the finance arm.
This purchase adds $52.80 to my annual dividend income based on the current quarterly payout of $0.22 per share. My portfolio holds 45 positions. This is unchanged since the last update, as this was an addition to an existing investment.
I'm going to include current analyst valuation opinions below, as I use these to concentrate my reasonable valuation estimate.
*Morningstar rates GE as a 4/5 star value, with a fair value estimate of $29.00.
*S&P Capital IQ rates GE as a 4/5 star Buy, with a fair value calculation of $26.10.
I'll update my Freedom Fund in early April to reflect my recent addition.
Disclosure: Long GE
What do you think of GE here? Think it's a buy? Or not interested? Why?