By Mark Bern, CPA, CFA
General Electric (NYSE:GE) derives approximately 47% of revenue from the U.S., 21% from Europe, 14% from the Pacific Basin, 9% from the Americas (less the U.S.), and about 6% from the Middle East and Africa. The stock is currently trading at a valuation that tells me that continued growth in all regions is expected. Let's look at that assumption for a minute.
In February 2011, the World Bank forecast "GDP growth for the U.S." would be 2.2% (here). The final tally was 1.7% GDP growth for the U.S.
This year the World Bank is forecasting just "2.5% world economic growth" (here), down from its earlier forecast of 3.1%. It is calling for a recession in Europe and slower growth in developing nations. Latin America and the Caribbean grew 4.2% in 2011 but are expected to slow to 3.6% in 2012, for example. I haven't seen an update to the bank's forecast for the U.S. in 2012; it was for growth of 2.1% but I would expect that number to be smaller after slashing forecasts for global output.
There are two points I'd like to make. First is that no matter how dire the World Bank forecast is, I have found that things usually turn out worse. In other words, I get the sense that the World Bank is generally more optimistic and is more likely to sustain negative misses to its forecasts than otherwise. The second point is that the outlook for economic growth in Europe and the U.S. is probably not that great for 2012. The recession called for in Europe could become worse than forecast and if it does it will probably shave some growth from the U.S. economy as well, and we don't have much to be shaven.
My concern is that GE is extremely dependent on the U.S. and Europe. The U.S. and European economies are not humming along at anything like what would resemble full recovery mode. I don't think that the GE dividend is in danger at this point, for all you long-term, income investors out there. But I don't think that the current price allows for much margin for error.
The company may have made strides to improve profitability, but it can't control its environment. And the 2012 environment is not a friendly one. I think the stock is priced too high relative to the economic environment that the company faces in 2012. I would not consider committing new funds to buy GE shares unless the price was to drop back down to $17 again. That would put the dividend yield at 4% and the P/E ratio at about 12.1, where it should be in this economy and with prospects for growth dwindling. I'm not telling long-term owners to sell. The company will still exist when I'm gone and the dividend should be sustainable. I'm just saying that I would expect a bumpy ride this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.