Is General Electric a Good Buy?

siraj is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Industrial companies with a diversified product line are an indicator of how the world economy is developing. In 2012, such companies experienced a slowdown in their organic revenues but did continue growing in the United Sates. Unfortunately, growth in Europe was mostly negative. The first and second quarters of 2013 brought more stabilization to the market, however, and showed that market demand is set to increase.

General Electric (NYSE: GE) is one of the best companies operating in this industry. In this piece, I will examine General Electric's future prospects and potential returns for investors. To do this, I will check its business plans and look at its financial situation for sustainable returns.

What General Electric offers for investors

<img alt="" src="http://media.ycharts.com/charts/26f40bc621d6af78ab5fec19d9ff6441.png" />

GE data by YCharts

At the moment, General Electric is offering a quarterly dividend of $0.19/share, yielding at 3.07%. In the last year alone, it has increased its dividends by 11.76%. General Electric is also increasing its payout ratio. Since 2010, its payout ratio has been increased from 40% of income to 50% in the trailing twelve months.

The stock price is also going up as the company is improving its profitability. In the last year alone, its share price surged by 17.84%. General Electric is still undervalued at present. General Electric is trading at near 17.2 times to earnings in the trailing twelve months, and less than 2 times book value when the industry average is at 18.4 times to earning and 2.8 times to book value. With a forward price-to-earnings ratio of 13.55, this stock has strong potential to continue its surge.

Financial analysis and plans to sustain returns

Recently, General Electric announced its second quarter results. The company reported operating earnings per share of $0.36, infrastructure orders increasing by 4%, U.S. orders increasing by 20% ,a record backlog of $223 billion and industrial segment margins that increased by 50 basis points. At the end of second quarter, the company's operating earnings are at $3.7 billion, down by 5% over the same quarter a year ago. Its net earnings of $3.1 billion show a 3% increase over that same quarter, however.

Six of its seven industrial business segments have shown strong growth. The company continues to invest in growth while reducing its structural costs. This will further enhance its margins by up to 70 basis points in the second half. If this happens, General Electric will be able to improve its profitability by 5% by the end of the year.

General Electric is working on a balanced capital allocation plan. It is looking to decrease the size of its portfolio while focusing on its core businesses. It is also expecting to generate considerable profits from its GE Capital unit after restructuring. This restructuring for the GE Capital unit is expected to be completed by the end of this year. This unit will also help it to generate improved profits next year.

General Electric is also aggressively working on a share repurchase program, showing that it has strong cash flows. This repurchase will also affect its earnings per share, improving them by 10%. With strong margin expansion, cost saving measures and improvement in its industrial segment business, the company is on track to generate massive cash for share holders.

Competition

General Electric’s main industry peers are United Technologies Corporation (NYSE: UTX) and Siemens AG (NYSE: SI).

United Technologies provides high-tech products and services to building systems and aerospace industries worldwide. Its segments are UTC Climate, Otis, Controls & Security, UTC Aerospace Systems, Pratt & Whitney, and Sikorsky.

It currently offers a dividend yield of 2.09%. At the time of writing, its stock is trading at its 52-week high of $107.77 per share. The stock looks a bit pricy to me as it is trading at 18.9 times its earnings and 3.6 times its book value. Overall, however, United Technologies is in a solid financial position. It is generating strong growth in both top and bottom line performance.

Siemens AG is engaged in electronics and electrical engineering. The company's operations are focused on three sectors: Industry, Energy, and Healthcare. Siemens is also offering hefty annual dividends and trades at attractive multiples. At the time of writing, it is trading at $111.11 per share. Its price-to-earnings ratio of 14.7 and price-to-book ratio of 2.7 both look better than the industry average.

The company is struggling to increase its top-line performance. At the end of the recent quarter, its revenues were down 7% over the previous quarter. It has been able to improve its earnings per share from $1.03 to $1.20 during the quarter, however. Siemens is also working on cost-cutting measures to boost its profitability. On the whole, the company is finding difficulties in growing its sales and will take some time to turn things around.

Final notes

General Electric is one of the best investment choices among its peers. the company offers nice-looking dividends with steady price appreciation. It is on track to achieve both top and bottom line performance as well. Its growth in industrial business is a strong sign of improved profitability, and its cost-cutting measures, margin expansion, and aggressive buyback will help it to generate strong cash flows for investors.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

 


siraj sarwar 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!

blog comments powered by Disqus