A Low-Risk Financial Stock With A Big Dividend And Significant Upside

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Includes: AAPL, C, GE, JPM, SPY, WFC
by: The Independent Investor

It is always interesting when there is a gap between the perception of most in the financial community and reality. While, certainly in the long run companies obviously tend to be valued better as the facts become more widely known, valuing stocks in a short time-frame is often difficult.

Most people in the trading and investing community tend to look at stocks through their most well-known products. Even today, a company as well-covered in the press as Apple (NASDAQ:AAPL), is still thought of by many as a computer company, despite the fact that the company now gets over 50% of its revenue from the iPhone alone

GE (NYSE:GE) is similarly viewed incorrectly by many in the financial community in my opinion. While many traditional traders and investors look at GE as a multi-national industrial company, GE consistently gets more than around 50% of its revenue from GE capital.

The company also reported its second straight strong quarter that showed impressive organic growth across most of its industrial businesses. GE recently reported double-digit growth in the company's industrial businesses, not including acquisitions.

Source. TheSreet.com

However, despite the strength GE reported across most of the industrial divisions, GE reported a nearly 12% drop in the company's year-over-year revenue from GE capital, and an 11% drop in the company's appliance businesses that are still heavily tied to the housing sector. Overall GE reported nearly 6% growth in revenue year-over-year.

While GE capital consistently generated more than 50% of the company's revenue during the years of the housing bubble, GE capital has consistently underperformed the company's industrial divisions for some time. GE's infrastructure, aviation, and other industrial businesses grew at the fastest pace since the 2008 crisis , but the company still showed just a mid-single digit overall revenue growth rate for the year.

Today, GE is fairly balanced between the financial and industrial businesses, which is why the company was eligible to receive funds from TAARP during the financial crisis.

While the company's financial division has weighed on its near profits for several years, the strength in GE industrial divisions has stabilized the company, enabled management to consistently pay a nearly 3% dividend, and keep the company's credit rating at investment grade. GE's share price has also outperformed most of the financials by a fairly wide margin during the last three years.

Source: TheStreet.com

GE has also outperformed most of the broader indexes like the S&P 500 and its tracking exchange traded fund, SPY (NYSEARCA:SPY), over the last six months since the company's fourth-quarter earnings report.

Source: TheStreet.com

Today there are also strong signs that the earnings of the financials are likely to moderately to significantly improve over the next couple years. Citigroup (NYSE:C) and JP Morgan (NYSE:JPM) recently reported strong growth in debit card and credit card transactions, and Mastercard also reported strong growth in credit and debit transactions when the company reported this week.

While real estate prices remain weak, housing starts and other data suggest that real estate prices have stopped declining in most major markets as well. The Case-Shiller index showed little decline in house prices in most markets over the last year, and new housing starts were up nearly 30% year-over-year.

To conclude, while most leading financial stocks have rallied significantly since their 2011 summer lows during the peak months of the European debt crisis, the future profitability of the financial sector is still in question. While some U.S. banks, like Citigroup , get nearly 70% of their company's total revenue overseas, most U.S. banks like Wells Fargo (NYSE:WFC) and JP Morgan, are still heavily tied to the real estate and lending market in the U.S.

Today, GE is primarily thought of as an industrial company, but GE still is likely to get around 50% of the company's total revenue from GE capital as the lending and real estate markets improve over the coming years.

While timing a recovery in housing is obviously very difficult, GE's strong and consistent growth across most of the company's industrial divisions over the last three years suggests that the company can still show significant organic growth even if GE capital's earnings remain weak.

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

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