General Electric: Steady As She Goes

Mar.16.14 | About: General Electric (GE)


General Electric continues its recent transformation by filing for an IPO of its U.S. Consumer Finance businesses.

Longer term, the company is well-positioned to benefit from the long-term demand from Emerging Markets.

With its high yield and stability, the stock should hold up well in any stock market sell-off.

Regular readers of my columns know that General Electric (NYSE:GE) has been a long-time core holding in my income portfolio. I believe in its long-term strategy to de-emphasize its financial businesses to become a more pure play industrial concern where it should be awarded with a higher multiple by the market.

General Electric took a major step towards that transformation last week when it filed for an IPO of its U.S. Consumer Finance business. The IPO when launched should give the separate entity a market capitalization of some $20B.

Barrons states the IPO should boost GE's multiple closer to that of other industrial concerns, such as United Technologies (NYSE:UTX). Included in the spinoff will be General Electric's credit card business which will reduce the overall company's exposure to the ups and downs of consumer spending. It also should reduce GE Capital's contribution to the profits of the overall company from 40% to one third.

Besides the transformation of this American manufacturing icon, there are a couple of other reasons the stock remains in my income portfolio.

Valuation & Dividend:

General Electric is not as a cheap as it was when I first purchased it. However, based on forward earnings, it sells right at or just under the overall market multiple.

The shares yield a robust 3.5%, and the company has raised its dividend 120% since emerging from the financial crisis. Once the company spins off its U.S. finance businesses, its need for capital should be lessened, and I would look for another 10% to 20% boost to the company's dividend payout by the end of the year.

Emerging Markets Proxy:

Although Emerging Markets have been under pressure since the Federal Reserve began talking about the need to "taper" back in May, as well as concerns about slowing growth in places like China, Brazil, India and Turkey, over the long-term, these markets will grow much faster than the developed world.

With an array of big ticket industrial goods such as locomotives, jet engines and million dollar medical systems that General Electric manufactures, it is well-positioned to benefit from this secular demand. This demand is a key factor on why General Electric currently has a record backlog level north of $225B.

In conclusion, GE makes for a good addition to any income portfolio. It yields 3.5% and should continue to increase its payout at a generous rate. It also provides a more stable and less volatile way to play the long-term growth opportunities in Emerging Markets. Finally, if the stock market continues to be volatile; its stability, huge backlog and high dividend should allow the stock to hold up well in any pullback in the overall market.

Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.