General Electric: Positioning For Earnings Growth, Not Dividend Growth

| About: General Electric (GE)

Summary

General Electric has been bouncing around in no man's land since December started and is just up 1.7% since that time, while the S&P 500 is up 3.1%.

The biggest news of late, though, was the potential addition of Baker Hughes to the GE family.

If Mr. Trump truly comes through on his word for domestic infrastructure spending, then GE should be a beneficiary.

General Electric (NYSE:GE) has been bouncing around in no man's land since December started and is just up 1.7% since that time, while the S&P 500 (NYSEARCA:SPY) is up 3.1%. On the bright side, investors who held the shares as of December 22nd will receive a $0.24 USD dividend. Nonetheless, the company is set to report earnings on the morning of January 20th, and I believe this is now a good time as any to check up on what has been going on at the company, considering the earnings results are just two trading days away.

Now that the company is focusing primarily on its industrial assets, the main driver should continue to be the aviation business segment. GE recently teamed up with Lufthansa (OTCQX:DLAKF) and announced a €250 million investment to build a plant in Poland which will service aircraft engines. The construction of the project will finish sometime in 2018 and be operating to repair and test 747-8 engines. This is an important investment, because as of the third quarter, the aviation division brought in US$6.3 billion in revenue, which was good for the second-highest segment under the industrial umbrella. The aviation division accounts for 21% of GE's total revenue streams, and it is the most profitable division at the company.

GE Power happens to be the company's highest revenue earnings segment as of last quarter, with sales coming in at $6.5 billion USD. But this may become a concern with Mr. Trump's decision to appoint a person who has sued the Environmental Protection Agency in the past to become the head of the entity now. GE, however, does not believe it to be a concern if the country pulls out from some global environmental initiatives. The notion is predicated on the fact that the power plants still want to become more efficient and release less emissions, and to do this requires some capital expenditures which can be directed towards GE. Having worked at an engineering consulting company which had its own proprietary carbon capture and recover technology, I can say that it is a tough sell to get these plants to add the technology. So I'm of the belief that it will be difficult for GE to help these companies out, especially if the regulations see some slack in terms of carbon emissions.

Despite the run-up in industrial stocks since the election, Stifel came out recently and selected GE as one of its top picks. The analysts stated that GE can thrive in a status quo growth environment in addition to a Trump domestic industrial growth environment. I have to agree with them from the perspective that it offers a 3% dividend yield and great short- and long-term earnings growth prospects. However, from a forward earnings valuation perspective, I believe the stock is fairly priced right now at 18.9x next year's earnings estimates.

The biggest news of late, though, was the potential addition of Baker Hughes (NYSE:BHI) to the GE family. I say potential deal because it still hasn't been closed. There may be quite a few hurdles the company will have to jump through to get this deal approved. But if it does get through, then it may just become a game changer in the oil & gas industry, if you're looking five years out into the future. This is a very large merger and it comes with its own integration risks, but the two companies expect the deal to close by the middle of this year.

Aside from this mega-merger oil deal, GE has been wheeling and dealing elsewhere in a continued effort to bolster industrial revenues. The company has been a leader in the additive manufacturing space, or 3D printing, and recently acquired Concept Laser and Arcam. Both Arcam and Concept Laser have a customer focus on the aerospace and medical industries. You can see now why GE wanted to acquire them, and now they play right into its wheelhouse. The purchase of the two companies could not have come at a better time, as the 3D printing space has been in a valuation decline over the past year or so due to commoditization of the industry.

If you're a believer in the Dogs of the Dow theory, then GE just missed the cut by a few percentage points. But being a DOTD doesn't necessarily mean it is a good thing. I think because GE just missed the cut, it will be a good thing, as the company is making the right moves to position itself for growth with less reliance on dividend. I'd much prefer earnings growth because it, in turn, means capital appreciation. This is GE's time to shine with all these deals, and will be Jeff Immelt's stamp on his tenure before he rides off into the sunset. The Internet of Things and digital technology segments are going to be key drivers as well, and that is why I have it in the wild card portion of my portfolio.

Mr. Trump has yet to follow through on anything because he has not been sworn in as POTUS yet, but he has been lacking clarity the entire way to The White House. No one is certain what he is going to do just yet due to a lack of details, but if he truly comes through on his word for domestic infrastructure spending, then GE should be a beneficiary. The aviation division should be a big part of that infrastructure build, as more planes will probably be in the air, thanks to increased household incomes.

With the company reporting fourth-quarter earnings this coming Friday, I anticipate it will talk quite a bit about the acquisition/spin-off of the oil & gas division with Baker Hughes. I believe this will be a good deal, as it will get the risky oil & gas division out from under the industrial umbrella and make it a pure play industrial company. Even if GE does report a good number and tells the story that analysts want to hear about the acquisition, it might be clouded by whatever Mr. Trump says at his inauguration speech that day.

I actually initiated my position in GE in late November and have been pretty ambivalent about the purchase thus far. But I will not purchase shares until GE gets below $30, because I believe that is where it offers additional value. I've selected $30 because it is the middle of the stock's 52-week range.

I swapped out of Delta Air Lines (NYSE: DAL) in favor of GE during the 2016 fourth-quarter portfolio change-out because I ended up turning a profit in the name (0.2%, or 0.6% annualized) and wanted to lock in those profits. So far, I have missed out on some gains since the swap. For now, here is a chart to compare how Delta and GE have fared against each other and the S&P 500 since I swapped the names.

At the end of the day, it only matters what a stock has done for one's portfolio. For me, GE is one of my smaller positions and hasn't done anything, as I'm down 0.05% on the name, while it occupies roughly 4.7% of my portfolio. I continue to believe in the name because it still has great earnings growth projections for the near and long term. I own the stock for the wild card portion of my portfolio, and I will continue to hold onto the stock for now. I am up 12.15% since the inception of my portfolio, while the S&P 500 is up 9%. Below is a quick glance of my portfolio and how each position therein is performing. Thanks for reading, and I look forward to your comments.

Company

Ticker

% change incl. DIV

% of Portfolio

Electronic Arts Inc.

EA

7.13%

3.71%

Facebook, Inc.

FB

5.20%

9.34%

The Home Depot, Inc.

HD

4.40%

4.85%

Eaton Vance Corp.

EV

4.31%

4.85%

AbbVie Inc.

ABBV

3.61%

3.94%

Starbucks Corporation

SBUX

0.76%

5.04%

General Electric Company

-0.05%

4.65%

Diageo plc

DEO

-2.22%

9.66%

Skyworks Solutions Inc.

SWKS

-3.62%

9.01%

V.F. Corporation

VFC

-6.06%

7.33%

Silver Wheaton Corp.

SLW

-8.39%

7.18%

Gilead Sciences Inc.

GILD

-11.52%

21.05%

Cash

$

9.40%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. 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: I am/we are long GE.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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