Buying GE (GE)...safe 5% yield and 10 times earnings....picked up some for $24.77 a share Friday morning. I first became really interested in GE when shares hit $23 and change but did not pull the trigger.
On Thursday, GE lowered guidance for the quarter and the year. Not a real surprise given conditions out there but two questions I had were answered. Was the dividend safe, and was its 'AAA' rating safe? The answer to both was yes.
Why does 'AAA' matter? Consider there are only 6 companies that carry that rating, Automatic Data Processing (ADP), Berkshire Hathaway (BRK.a), GE (GE), Johnson & Johnson (JNJ), Exxon (XOM), and Toyota (TM). It simply means safety and low cost of capital. In these times, with the inevitable credit contraction with us for years, a 'AAA' rating will take on more importance.
I like high, safe dividends. I currently hold Altria (MO) at 6%, Phillip Morris International (PM) at 4%, Dow Chemical (DOW) at 5%, Wells Fargo (WFC) at 4% dividend yields. I've now added GE at 5%. All of the above had dividends that, were they to be forced to be cut, simply would mean economic conditions have deteriorated to the point that the actual dividend cut would be the least of all our worries.
Watch the following video from Thursday. Please ignore CNBC's Melissa Francis saying GE Capital was a "buy to sell" model. It isn't (that has been discussed here on this blog before as a reason to maybe buy GE shares). It is a "buy to hold" and Immelt corrects her...how could she get that wrong? She just interviewed her boss and had the business model for the company's main profit driver wrong....I bet it will come up at review time. Anyway, the video.
Here is an interview with Charlie Rose from March.
I think it is safe to say Immelt (along with virtually every economist and other business leader) underestimated the scope of the current crisis. That being said, I can't single him out as "being wrong" about the future. But, if we look at the various businesses, one must be encouraged. GE is global in scope and will benefit from global growth. Its financial services, being hit hard by the crisis, still maintain 'AAA' ratings despite the turmoil. That means very attractive opportunities will arise for GE that other lenders will not get, or be able to fund.
Now, the Immelt bashers will point to the stock being near $60 a share in 2000 (yielding less than 1%) and want his head for its fall. But GE made $1.27 a share that year. So, if you paid 47 times those earnings in 2000, Immelt is not the problem, you are. Paying 47 times earnings for a conglomerate the size of GE, is well, for lack of a better word, just moronic. But, 10 times earnings with a 5% yield?
Essentially a bet on GE at this time is a bet on the global growth story, at a very good price, and a 5% yield. It may take some time to pan out, but I think it will, handsomely.
Disclosure: Long GE,MO,PM,WFC,DOW.
This article has 4 comments:
Now I don't pretend to know much about GE but what I do know is that they have aggessively lent money to those desperate for money.
In the week ahead, we will find out who was holding Wamu paper and will have to take further writedowns -- eroding confidence.
In this crazy environment, at the margin, most people are going to retrench and go high up the quality scale. The more uncertain, I firmly believe that this pays into GE's hand.
I concur. GE will be seen as a haven of safety and reliability in uncertain
times. Caveat-Immelt must ensure no CDO or other surprises @GECap.