Is General Electric a Buy?
Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
General Electric (NYSE: GE) is one of America’s iconic companies and is a true conglomerate, producing everything from refrigerators to jet engines. GE is one of the biggest companies in the world and is a bellwether for corporate America.
While the past five years have seen a fair amount of turbulence for many of GE’s businesses, it appears that the company is back on solid footing. GE shares have climbed more than 30% since the beginning of 2012, and the company has resumed increasing its dividend on a regular basis. Now that the dust has settled from the 2008 crash, does GE represent an attractive stock to buy?
Recent industry developments
GE posted a 16% increase in first-quarter earnings per share year over year, despite ongoing weakness in Europe. On a segment-by-segment basis, it’s clear that some of GE’s business lines are performing better than others to start 2013.
Notably, GE’s flagship Industrials businesses, which range from jet engines to medical equipment, saw sales fall 6% in the first quarter. Shareholders should take note, since GE’s Industrials operations accounted for 65% of total revenue in the first quarter.
Strength was seen in the company’s aviation and transportation segments, as well as from GE Capital, its financing arm. Another positive note was the company’s extensive backlog of orders in the first quarter. The backlog of industrial orders rose to $216 billion, representing the highest level in GE’s history.
While GE’s extensive business has few true competitors, there are other stocks in the industrial space that warrant attention. United Technologies (NYSE: UTX) is a fellow industrial conglomerate whose businesses include Otis elevators and escalators; Pratt & Whitney aircraft engines; and Sikorsky military and commercial helicopters.
UTC’s net sales ticked up 3.4% in 2012 to $57.7 billion, while diluted earnings per share were essentially flat year over year. UTC has had some trouble digging itself out of the hole caused by the financial crisis. Sales are up only 14% since 2009, and the company’s debt to capital ratio increased by 15 percentage points last year as compared to 2011.
Competitor Boeing (NYSE: BA) also has immense operations in aerospace and defense, and has the financial performance to back up its rallying share price. Boeing's shares sit only a couple dollars away from its all-time high.
2012 was a banner year for Boeing. The company booked a record $81.7 billion in revenue, representing a 19% increase year over year and earnings of $5.11 per share.
Boeing showed impressive resilience in its first-quarter earnings, reporting 18% growth in net income per share, despite the well-publicized issues surrounding the Dreamliner 787. The company is hardly expecting any negative effects from the issue at all. Boeing reiterated that it expects core earnings to reach $6.10 to $6.30 per share this year on revenue between $82 billion and $85 billion.
Shareholder returns a priority once again
After slashing its dividend during the depths of the financial crisis, GE has resumed its practice of returning substantial cash to shareholders. While investors likely remember the painful memories of GE cutting its dividend from $1.24 per share to $0.40 per share annually in 2009, it’s worth noting the company has increased its payout five times since then.
GE’s 3.2% dividend yield compares very favorably to United Technologies and Boeing. GE currently yields 100 basis points more than its two competitors. For die-hard income investors, GE’s dividend growth has to be considered encouraging enough to calm any fears of another downturn.
I’ve written critically of GE before based on its massive debt load, and unfortunately that story hasn’t changed. At the end of last year, GE had more than $236 billion in long-term debt.
As a shareholder, I’d be very concerned about this much debt, particularly if we are about to embark on an environment of rising interest rates. GE lost its coveted triple-A credit rating during the financial crisis and may see dramatically higher interest expense going forward if it cannot refinance its debt at low rates.
However, until proven otherwise, GE looks to be back on solid financial footing. The company is reporting solid growth in sales and profits, and pays an attractive dividend, and as a result, appears to be a decent, if unspectacular, buy at these levels.
For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, the Fool's offering comprehensive coverage for investors in a premium report on General Electric, in which the Fool's industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE today. To get started, click here now.
Robert Ciura has no position in any stocks mentioned. The Motley Fool owns shares of 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!