Is Now The Time To Invest In General Electric?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When talking about General Electric (NYSE: GE), most people think about light bulbs. Yes the company does still make light bulbs, but they also do much more. They've become a truly diversified conglomerate with business operations in technology, financial services, and infrastructure. Because they are involved in so many businesses, they don't face industry risk as severely as some other, more focused companies might. If one industry does poorly, General Electric can still perform okay if the other industries do well.
Technically speaking, General Electric has had a nice year. Over the past 52 weeks, shares of the company have appreciated in value by about 30%--a pretty good performance by all accounts. The company has also seemed to get itself back on track after the financial and economic collapse during 2008 and 2009.
Financially speaking, General Electric has a lot to be pleased about. They have been extremely profitable, with a 9.39% profit margin and 9.67% operating margin. The company has a Forward PE Ratio of 12.64, which ranks in the upper 25% of all conglomerates. The company has an ROE of 11.27% and a projected long-term growth rate of 11.06%. Combining the strong fundamentals with the strong technicals makes General Electric start to look very appealing.
As if the above information didn't present a pretty enough picture, let's throw in the fact that General Electric has a 3.2% current dividend yield. For a company's share price to appreciate 30% and also pay a 3.2% dividend yield is amazing. This is definitely a strong candidate to stick in a balanced portfolio and watch the gains roll in over the next few years.
General Electric also presents a compelling valuation compared to its competitors. General Electric's current PE ratio is 16.73. Citigroup (NYSE: C), which is a financial services competitor of General Electric, has a PE ratio of 17.89. Additionally, while GE's ROE is over 11%, Citi has only been able to obtain a 4% ROE. Lastly, GE's dividend yield dwarfs Citi's dividend yield, which currently sits at roughly 0.10%. Citigroup recently benefited from the tax deal that Congress passed to start 2013. The deal extends the "active financing exception." This exception allows corporations to avoid paying taxes on money earned by foreign subsidiaries as long as that money is not repatriated into the U.S. This deal allowed Citi to keep $1 billion, but it allowed GE to keep an even more impressive $3 billion.
Another close competitor of General Electric is Siemens (NYSE: SI), which is an electronics competitor of General Electric. Siemens has a PE ratio of 17.13, which is more expensive than General Electric's. Additionally, the company only has a dividend yield of roughly 2.75%, which is about 0.75% lower than General Electric's. One positive about Siemens is that they are currently embarking on large cost cutting measures in order to bring their overall valuation back in line, but General Electric is taking a different path. Instead of focusing on cost savings measures, it is focused on the next growth phase. It has invested $1 billion into its digital division. It has also set aside roughly $100 million for a new research center in San Ramon. So General Electric looks better on valuation, pays a higher dividend, and is focused on new growth areas compared to Siemens, which is trying to cut costs. I think GE has a better story going forward.
One potential risk is the fact that the company has become more involved in the financial services industry over the past 10 years. This almost put the company out of business during the 2008 economic collapse, but the company did survive. Should the country face another economic situation as bad or worse than that of 2008, General Electric could have their share price cut in half.
With the U.S. facing a debt ceiling crisis in the next few months, it is possible that General Electric could become a casualty. So investors may want to sit on the sidelines until Congress is able to negotiate a deal. Once the situation is resolved, I will certainly be adding General Electric to my portfolio, and I think all value and dividend investors should consider doing the same.
ET1980 has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!