If you have been following the tips on this and other financial blogs you will become a producer instead of a consumer. And you will find joy in the simple life. And eventually, ever so slowly, even with a gigantic tuition, you will have some money to put aside. For me that goes into dividend stocks that are high quality and that align with my values.

This month’s stock pick is General Electric.

This company has really declined dropping almost 60% quoted value in the last year compared to an almost 12% rise in market quoted value during that same period.

General Electric Trailing 12 Month Valuation April 2018

General Electric Trailing 12 Month Valuation April 2018

[1]

 

 

What happened?

It has become apparent that some of GE’s businesses aren’t doing well. More importantly the reported numbers appeared to be subject to what is called performance theater and very positive views of the business were presented in past years that might have been too optimistic.

This uncertainty combined with a stark new reality including billions of unexpected charges and, just this past week, a plan to restate all the previous numbers has folks repricing the company.

Institutional investors understandably don’t want to put other’s people money into something that can’t even assess since the reported earnings and projections both appear to have been incorrect. The company suffered from a very rapid repricing and then was followed by a market imbalance where lots of folks wanted to sell and not so many wanted to purchase. That market imbalance causes the price to automatically adjust downwards (sometimes rapidly) until a new balance is found. This might very well continue down from here.

 

The business

This isn’t the GE you might know from your home. They don’t even own the GE appliance brand anymore – they sold it and the name. Much of their business is industrial services. They create and service the leading air craft engine, medical imaging equipment locomotives and electrical generation plants. These are tough business to get into from a standing start so they have a fairly defendable position built up through the hard work of previous GE teams over the last 100 years. They debt load is astronomical (over 100 billion) and, depending on their terms and the direction of rates in coming years could be very damaging for many years. However, their revenue generation is huge – $122 billion last year (well, something along those lines – we shall see after they restate it) making in the top 20 of all companies![2]

 

With those kinds of numbers and excellent margins in many of their business a batch of cost cutting should enable them to improve their financial condition substantially.

 

The valuation

Looking ahead even this new price of $12 a share, down from $30 last year isn’t as cheap as you would think. Based on the company’s own revised estimates of earning a dollar a share that is still a PE of 12 or, if you pretend it’s a bank account, a earnings yield of 8% (some of which is paid out in dividends. I can get the maker of Sharpie pens for less, even in today’s elevated market.

As is often the case, that isn’t’ the entire story. Some folks are saying that $1 estimate is too high and earnings will be half that  or just 50 cents per share this year.  And they might be right.  Suddenly this company doesn’t look so cheap – even with it’s share price cut in half.

 

The long view

However, the company is cutting costs and selling assets. Just a few years back they reported earnings of over $2 a share – and assuming that is reasonably close to the restated earnings – that is pretty good. Indeed, should succeed in rationalizing the business they might even return to that number within a decade.

And if they do that today’s price looks a lot better. What you are looking at today is the pricing in the trough of their earnings and dividends (which they recently cut in half).

In our imagined future of returning to $2 a share of earnings the PE ratio based on today’s market quotation is 6 and the earnings yield is 16%. And while the dividend yield is unlikely to return to previous levels anytime soon there may be upside there as well.

 

The assessment

For the really patient and risk tolerant investor with a long horizon this is an interesting offering. And should the company return to its previous earnings –it’s historical price to earnings ratio is about 17 placing the future price around $34 a share and the annual return at just under 11% in market value increase plus the dividend of 3% for an annual return of 14% over a ten year period which would be excellent.

Of course they could also default which means you must make your own assessment and this post is not intended as a recommendation or financial advice.

Full disclosure

Many years ago my grandmother owned general electric stock and the proceeds from its sale helped pay for some of my education. I have a very favorable view of the company, am happy to have this opportunity and might have a lot more patience than other investors for that reason.

 

[1] “GE Interactive Stock Chart | General Electric Company Stock.” Yahoo! Finance. Accessed April 12, 2018.

 

[2] “General Electric.” Fortune. Accessed April 12, 2018. http://fortune.com/fortune500/general-electric/.

 

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