The "Culture series" of sci-fi books by Iain M. Banks features spaceships that are tens of kilometers long. When I think of General Electric (NYSE:GE) I am sometimes reminded of those huge ships. The company is also massive and it takes it a long time to change direction, or recover from shocking events.
Out of the current Dow stocks, GE ranked dead last in total returns during the Great Recession period -- 29th out of 29 (Visa was not a public company at the time).
GE stock is still below the level that it attained before the recession hit as the company tries to turn the giant ship back around.
GE Total Return Price data by YCharts
(Shaded area is the Great Recession time period)
Note that in the last five years, GE stock has edged out the S&P 500:
GE Total Return Price data by YCharts
Revenues, however, are also still well below the levels seen in 2008:
GE Revenue (TTM) data by YCharts
Now I will look at some important metrics for the company followed by my recommendation.
Getting Bang for the Buck
Two of the most important metrics to look at for a company are the ROE (Return on Equity) and ROA (Return on Assets) ratios. GE shows poor trends for these all-important figures.
GE Return on Equity (TTM) data by YCharts
Much like GE's revenues, the ROE and ROA ratios have been stuck in a rut since 2009 and are below what an investor would like to see in a large-cap company (ROE of 12% - 15% is considered healthy).
Like many aspects of GE, the dividend is struggling to achieve the level it was at in 2008:
GE Dividend data by YCharts
Nonetheless, the growth in the dividend since 2010 (more than doubling) has been a good sign for income investors. GE currently yields 3.3%.
Valuation of the Stock
The forward P/E ratio history for GE shows that the ratio is now at about the level was before the Great Recession:
GE PE Ratio (Forward) data by YCharts
According to Yahoo Finance, the average analyst estimate of EPS growth in the next five years is 8.93%. In the past five years, GE grew EPS at an average of 11.35% annually.
Another metric I like to look at is the net common payout yield. The net common payout yield is the dividend yield plus the net buyback yield. For example, if a company with a market cap of $100 million repurchases $10 million worth of stock in the last twelve months, issues no new stock, and has a dividend yield of 3%, then the net common payout yield would be 13%.
GE Net Common Payout Yield (TTM) data by YCharts
Here GE scores above average marks. It is consistently returning about 6.5% to shareholders which I consider to be very good. A yield of 8% or more I consider to be excellent and a yield of 10% or more is exceptional (and rare to keep up for long).
Finally, I will look at the technical trend:
The resistance and support lines of the wedge that GE is currently in will converge in about 6 weeks. By then, the stock will have to move - one way or another - out of the pattern that it has been in since the start of 2014.
Note the scale of the finviz graph above. GE has actually moved very little in 2014 as the range of the stock has been about $24 - $27.5 per share.
GE appears overpriced to me for several reasons:
- The PEG ratio is currently at 1.77 (using forward P/E, which actually lowers the PEG);
- Revenue, even after the Great Recession, has trended downward;
- ROE and ROA ratios are weak.
However, the stock has support due to two major factors:
- The dividend yield is above average;
- Buybacks continue to improve EPS.
The PEG ratio is the factor that causes me the most consternation about GE. 1.77??? That is a number that only makes sense if the company was about to have a major turnaround (think of that huge ship again) and suddenly start to show much more robust growth than anyone expects. As I noted above, the next five years' EPS growth is expected to be substantially lower than the last five years' growth.
Considering the forward P/E (near the 2007 level), I think some contraction in the P/E over the next 6-18 months is due. The stock may very well continue to be propped up by buybacks and the fairly strong dividend yield, but I do not think the stock deserves such a high forward ratio (barring exceptional news to the upside).
For my target price by end of 2015, I will use a forward P/E of 14 and a consensus 2016 EPS estimate of $1.95 per share. Multiplying 14 by 1.95 gives a target price of $27.30 per share.
It would not surprise me to see GE pop up to about $28-$30 in the short term, as the technical chart shows that it could break out to the upside. If it does, I would see that as a good selling opportunity. The long-term fundamentals don't seem to support much upside for GE.
Nonetheless, the dividend sports a high yield and should continue to grow at a good pace. For those investors who prize income above all else, the stock may be a solid pick.
Recommendation for a total return investor: Sell
Recommendation for a dividend investor: Hold
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.