- The relative strengths and weaknesses of the two industrial giants, General Electric Company and Siemens AG.
- A side-by-side comparison of key metrics of the two companies. Also included is the relative rating assigned based on a rating system.
- An analysis of which of the two will be a better investment for a long-term dividend growth and income portfolio.
Recently, General Electric Company (NYSE:GE) and Siemens AG (SIEGY) have been in the news, as they are engaged in a bidding war for the past two months to acquire and control the Energy business of the France-based Alstom (OTCPK:ALSMY). A decision is expected soon, but regardless of the outcome, both companies will remain formidable competitors in the industrial and power segment and good candidates for your investment dollars. As such, GE and Siemens, the two giants, need no introduction, but for the sake of completeness, I will offer some perspective.
GE's history goes back to 1874, however, GE as a company was formed in the year 1892 with the merger of Edison General Electric Company and Thomson-Houston Company. During its over 120 years of existence, GE has provided some life-changing innovations and commercially viable products from electric power and light to first portable X-Ray machine, trans-oceanic radio system, vacuum-tubes and the world's most-produced jet engines. At one time, it was the largest company in the world by market-cap, however, at the end of 2013, it ranked as the 6th largest company.
Until the year 2009, GE was considered a dividend aristocrat, with 32 consecutive years of dividend increases, and no dividend cut since 1938. During the height of financial crisis in 2009, it all changed when GE had to cut its dividend drastically, and it fell from grace with dividend investors. For this reason, it is no longer considered a dividend aristocrat or dividend champion.
However, since then GE, both as a company and as a stock, has recovered substantially. It has raised the quarterly dividends from $0.10 per share in 2009 to $0.22 per share in 2013, nonetheless still lower than $0.31 per share before the dividend cut. Also, in 2013 the company generated in excess of $1 billion of revenue from 24 countries, which was up from 11 countries in 2003. GE's net income has stagnated recently, but has gone up almost 20% since 2009. Earnings per share has grown to $1.28, up 27% from 2009 levels. GE also returned $18 billion to shareholders in 2013 alone, in the form of dividends and share buybacks. It employs over 300,000 people in more than 140 countries and generates roughly 60% of its revenue outside the U.S.
Siemens was founded in 1847, and today it is a global powerhouse in industrial, infrastructure and electrical engineering with its headquarters based in Germany. Siemens operates in 4 major segments - Energy, Healthcare, Infrastructure and Industry. It employs roughly 362,000 employees, with two-thirds of them outside Germany. Siemens uses a low financial leverage and generates plenty of free-cash flow. It generated total revenue of euro 76 billion in 2013 with euro 5.2 billion in free cash flow. Europe (including Germany) accounts for about 50% of its revenue, with the U.S. accounting for another 19%. Emerging markets now account for more than 20% of the business.
The company is paying an attractive dividend of EUR 3 per share. It has had an almost 20 year dividend history, at least since 1995, during which it has never cut the dividends, but has raised them at regular intervals; once every 3-4 years. Its dividend has grown from EUR 1.10 in 2004 to EUR 3.00 in 2014 (giving a CAGR of 10.5%). Furthermore, Siemens announced a $5.5 billion share buyback program last year, which should elevate overall returns to the shareholders.
Comparison of Key Metrics for the Two Companies
The below table that I created shows key metrics based on the full financial year 2013, as taken from Morningstar and Google Finance. It may be noted that Siemens financial year ends in September.
Comparison of the current market prices with the fair value estimates (in the above models) shows that Siemens is more reasonably priced, and there is a better margin of safety with Siemens. GE is by-and-large, fairly priced at current prices.
Now let's assign a "rating" to the two companies based on a Rating System that I have created for my use, and is available on my website. This system takes into account three sets of elements; fundamental ratios, growth estimates and the dividend strength of the company. Each of the criteria gets a rating based on pre-defined rules, and can have an individual rating from 0 to 1.20 (max). The net total rating is the sum-total of individual ratings and results in a value in the range of 0 - 10, 10 being perfect and 0 being the worst. Like any other mechanical rating system, this system is not perfect by any means and would not substitute other means of research, but what it can do is to offer an unbiased decision point, while comparing two or more companies. Below is a table that I created showing the relative "rating" for GE and Siemens. Please see the complete rules and disclosures about this rating system here.
The above model also rates Siemens significantly better than GE. I think this is primarily the result of the past 5 years when GE was reeling under the impact of the financial crisis due to the role of its financial arm (GE Capital). However, please note that this rating model is more heavily weighted towards the past than the future. Only 3 criteria out of 15 are based on future expectations. During the last decade, Siemens has been a more stable company compared to GE, and that is reflected in the results from the Rating system.
It is difficult to predict or even make a guess which company will do better in the next 5, 10 or 15 years. In my opinion, both companies should do well provided the world economy hums along. In the short term, GE's stock may outperform Siemens. However, if your horizon was long term (10 years or more), and you wanted to have exposure to industrial segment, it may just be wise to split your investment dollars in both companies and bet on the growth of the developing world. Both of these companies are well-entrenched in the emerging and developing markets and growing their share every year.
However, one caveat on tax implications for Siemens holdings, though. Germany imposes a 26.375% tax-at-source on the dividends, and if you were holding Siemens shares in a retirement or IRA type of account, you will not be able to claim a tax-credit from Uncle Sam, effectively reducing your dividend payout; thus it may be better suited for a taxable account.
Full disclaimer: The information presented in this article is for information purpose only and in no way should be construed as financial advice. Every effort has been made to present the data/information accurately, however the author does not claim for 100% accuracy.
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