Does General Electric Pass The Test Pfizer Did ?

| About: General Electric (GE)

Summary

Pfizer passed all the five questions but General Electric doesn't.

Were investors who fled the stock in 2009 right in hindsight?

Key lessons for investors to take forward.

This article was written to evaluate how investors in Pfizer (NYSE:PFE) would have done in hindsight had they stuck with the stock through its tough times since the dividend cut in 2009. The numbers turned out to be quite impressive and many readers acknowledged that they had similar returns with the stock. Some readers agreed with the metrics used in the article to evaluate companies that happen to slash/freeze dividends.

We were curious to repeat the experiment for another well-known stock that cut its dividends in 2009, General Electric (NYSE:GE). To be honest, we expected the results to be positive, so that it'd further support the argument that investors should stick to solid companies through thick and thin. But the returns shown below are disappointing. It'd be a disservice to readers to present only the good side of a strategy you believe in. Let's get into the details.

Let us assume an investor bought 1,000 shares of General Electric in March 2008 at $37.74. Some quick Q&As before moving on:

  • Why March 2008: The market panic really hadn't set in nor was the dividend slashed at this point. In other words, things were fairly rosy.
  • Why $37.74: That's the highest share price we could find for General Electric according to Finance.Yahoo.Com.

Assumptions/Calculations in the Tables:

  • 1000 shares purchased at the "pre-dividend cut" high of $37.74 in 2008.
  • Assuming no new shares were purchased during the sell-offs. This is to retain the simplicity of the calculations and also it'd be hard to guess the buying price for those transactions. Plus, not many investors have the conviction to buy a $37 stock that has fallen to $6. Most would be running for the cover.
  • The second column shows the annual dividends paid for the years mentioned in the first column. Notice the minor blip in 2010 as a result of the dividend working its way up from the 2009 slash.
  • Reinvestment always happens at the yearly highs. That is, if General Electric had a yearly high of $25 and a year low of $20 in a calendar year, the first table below always uses the high of $25 as the reinvestment price to find out the pessimistic returns.
  • Current share price is $28.45 at the time of writing.
  • The initial investment of $37, 740 has turned lower into $34, 310.64 in about 7 years for a total return of -9%. Keep in mind that reinvesting at highs all the times is a pessimistic scenario but Pfizer passed even this with a total return of 65% for the same time period.
  • Since General Electric's numbers pale in comparison for the worst-case scenario, we ran the numbers for reinvesting at the yearly lows and that is shown in the second table below. Even that doesn't look good.

(Reinvesting at highs: click to enlarge)Click to enlarge

(Reinvesting at lows: click to enlarge)

Takeaways:

So, if the message is to stick with quality companies through thick and thin, why didn't General Electric have the same results that Pfizer did? What could investors take forward from this experiment?

The following five questions were used in the Pfizer article. Let us take a look at how General Electric is doing using the same metrics. These questions become even more important considering that General Electric has announced a dividend freeze throughout 2016. Should investors stick with the stock?

  • Is the integrity of the company/management in question? - Neither Yes or No. While it would be unfair to dispute the company's integrity overall, many investors felt let down by the dividend cut, especially after public statements indicating the opposite. Could it be that the management were misleading themselves, perhaps without bad intentions? The then CEO perhaps believed the 10% yield was sustainable. (This question would have received a resounding "No" for 2009 though).
  • Is the company still one of the first 3 to 5 names that come to mind when talking about industry leaders? - Yes for both 2009 and right now.
  • Is the company having an isolated incident that is unlikely to occur again? (Think mergers and acquisitions, one time write-offs etc) No. General Electric's issues are fairly cyclical in nature given the sector they operate in. But one factor in the company's favor right now is that it's reliance on the finance side of business has drastically reduced.
  • Is the company the only one in trouble in its industry? No but even this point is slightly debatable. Other companies like Cummins (NYSE:CMI) that were operating in the same major sector/industry as General Electric did not have to cut dividends. Cummins had to only freeze for a year or so and then dividends start raising again. Yes, the comparison isn't like for like given General Electric's exposure to the finance side back in 2008/2009 but the General Electric was as much into industrial goods if not more.
  • Is it an overall economic meltdown that leaves no one unhurt? Yes. This was true in 2009. 2016 remains to be seen.

Keep in mind, investors should be looking for a "No" for Questions 1 and 4, and a "Yes" for Questions 2, 3, and 5. General Electric does not have the expected answers for questions 1 and 3, with question 4 being on the border. That gives it a score of 2.5 to 3 out of 5 while Pfizer had a perfect 5/5.

This experiment just means that we won't be buying shares in General Electric in the wake of the dividend freeze as history has shown that it takes a while for the stock to get back its charm. That is not slandering the stock, just that it does not fit into the strategy we follow for our portfolio. We usually like to establish a position and rarely like to sell. General Electric does not fit that realm.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.