High-Yielding General Electric Should Provide A Higher Yield Soon

Aug. 4.14 | About: General Electric (GE)

Summary

The company successfully began to separate itself from the retail credit business with the IPO of Synchrony Financial this past Thursday.

The stock is inexpensively valued on 2015 earnings estimates, and the financial efficiency ratios have increased a tad.

I still like the stock but don't like the current risk/reward ratio, and will not be purchasing shares at this time.

The last time I wrote about General Electric Company (NYSE:GE), I stated, "I'm only buying a small batch right now to grab a slice of the dividend, but am not really enthusiastic about it." Since the article was published, the stock has decreased 5.48% versus the 0.65% drop the S&P 500 (NYSEARCA:SPY) posted. General Electric is a diversified technology and financial services company operating in the segments of aircraft engines, power generation, industrial products, water processing, household appliances, medical imaging and business and consumer financing.

On July 18, 2014, the company reported second-quarter earnings of $0.39 per share, which were in line with the consensus of analysts' estimates. In the past year, the company's stock is up 2.63% excluding dividends (up 5.88% including dividends), and is losing to the S&P 500, which has gained 12.59% in the same time frame. Since initiating my position back on May 28, 2013, I'm up 1.09% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the industrial goods sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 17.36, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future, as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 13.88 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $1.83 per share, and I'd consider the stock inexpensive until about $27. The 1-year PEG ratio (1.97), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced, based on a 1-year EPS growth rate of 8.81%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next Yr. ($)

Target Price ($)

PEG

EPS Next Yr. (%)

02Oct13

24.17

17.26

13.36

1.81

27

1.92

8.98

16Dec13

26.98

19.27

15.51

1.74

26

3.06

6.30

01Feb14

25.13

16.87

13.81

1.82

27

2.46

6.87

02Mar14

25.47

17.09

14.06

1.81

27

2.62

6.53

16Jun14

26.82

18.89

14.73

1.82

27

2.54

7.43

02Aug14

25.35

17.36

13.88

1.83

27

1.97

8.81

Click to enlarge

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 3.47% with a payout ratio of 60% of trailing 12-month earnings, while sporting return on assets, equity and investment values of 2%, 10% and 3.2%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 3.47% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 4 years. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

02Oct13

3.14

54

2.1

11.5

2.8

16Dec13

3.26

63

2.1

11.3

2.8

01Feb14

3.50

59

3.1

16.6

5.0

02Mar14

3.46

59

3.1

16.6

5.0

16Jun14

3.28

62

1.9

9.9

3.2

02Aug14

3.47

60

2.0

10.0

3.2

Click to enlarge

Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock bouncing off of oversold territory, with a current value of 36.04. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line, with the divergence bars increasing in height. As for the stock price itself ($25.35), I'm looking at $25.82 to act as resistance and $24.49 to act as support, for a risk/reward ratio which plays out to be -3.39% to 1.85%.

Shedding Some Weight

CEO Jeff Immelt and the company have been planning to shed some weight from the company in the form of an IPO of Synchrony Financial (NYSE:SYF), the company's North American retail credit unit. Synchrony was IPO'd on Thursday July 31, 2014. The goal for the company is to attain 75% of earnings through its industrial segments by 2016, and the company is currently 4% away from that goal. The retail credit unit accounts for a good portion of the GE Capital segment, but the company so far is planning to keep the safer specialty finance portion of the segment in GE Capital.

GE plans a complete separation of Synchrony by the end of 2015 via a split-off transaction. Only 15% of the shares have been IPO'd so far. If the spin-off is by way of trading in my GE shares for Synchrony shares, I will not be participating in it. I'd rather keep the industrial giant and just purchase shares of Synchrony on the open market. This strategy should bode well for GE in the future, as it has been the financial portion of the company that has been weighing it down for the past ten years. During the past ten years, when compared against peers such as United Technologies (NYSE:UTX) or Honeywell (NYSE:HON), GE is down 23.76% versus a 124.06% gain for United Technologies and a 143.46% gain by Honeywell.

Conclusion

I'm fully aware the majority reading this article owned GE prior to the financial fiasco a few years ago and have felt a lot of pain. I started investing back in 2007, and GE was one of the first stocks I ever bought (in a different portfolio), and I too felt some pain from it. Then there are some who loaded up on the stock while it was dirt-cheap and are reaping the rewards. I, for one, did not load up on the stock, because I felt it was too risky at the time when Warren Buffett was purchasing warrants (hindsight says that was the all-clear, though). This is why we study history, so that we are not doomed to repeat it. Hence why we write these articles, read them, and give our feedback, for all of us to learn from each other.

Fundamentally, I believe the stock to be inexpensive on next year's earnings estimates but fairly valued on short-term earnings growth expectations, while next year's earnings estimates have increased. Financially, the dividend is pretty good, and the financial efficiency ratios have increased since the last earnings report. On a technical basis, I believe the stock is oversold, but I don't really like the risk/reward ratio right now. I still like the stock and liked this most recent earnings report, but will not be purchasing any shares at this particular moment, as I believe the industrial related stocks are taking another bloodbath right now.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long GE, SPY. 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.