Is this the beginning of the end for General Electric Company (NYSE: GE)? Or is it the start of a new profitable chapter for one of America’s most-known and respected conglomerates?
If you are a firm believer in the GE story, then there’s no better time to buy General Electric stock. The company’s shares can be had on the cheap, down 12 percent since Monday — the day that the company announced it would cut GE’s generous dividend by half amid a restructuring.
But GE today appears to be a classic value trap. There are no quick fixes when a company’s problems go back for years and no guarantees that they can be solved at all. GE is the worst-performing stock in the Dow, dropping more than 42 percent so far this year (the Dow Jones industrial average rose 18 percent).
Investors have seen plenty of turnaround efforts from GE in the past. Previous efforts saw the company spin off GE Capital, sell NBC Universal to Comcast Corp. ( CMCSA), and try unsuccessfully a decade ago to divest itself of its iconic appliance and lighting businesses.
The company that once seemed to have a hand in everything now says it will focus on three primary areas — aviation, power and health care — as it tries to reshape itself again.
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John Flannery, who took over in August as GE’s CEO, says he’s focused on the big picture. “I’m not trying to run the company for the reaction on Monday and Tuesday or Wednesday of this week,” he told CNBC. “We have a long-term plan. We have a lot of work to do. We’ve reinvented ourselves many, many, many times.”
An American company. It’s hard to get more all-American than General Electric. Co-founded in the 19th century by famed inventor Thomas Edison, General Electric has an impressive history of inventions under its belt, including the first incandescent lamp (thanks, Edison!), X-ray machine, radio broadcast, television set and the first licensed nuclear power plant. It pioneered fluorescent light technology, silicones, plastics, power generation plants and jet engines.
GE products are in everything from the Mars Rover to Air Force One. It is a leading force in developing wind turbine power, cylinder gas engines and making electric utilities more efficient. The nation owes a note of thanks to GE and its brilliant scientists.
But as it entered the 21st century, GE had nowhere to go but down.
A long, hard fall. In 2000, GE stock was at its peak, topping $58 per share, and profits were rolling in. Chairman Jack Welch was near the end of his 20-year run that, helped by a long bull market, saw the company’s revenue rise 385 percent, while GE’s market value soared 4,000 percent.
GE was also very good at managing Wall Street’s expectations during the Welch years. GE exceeded analysts’ expectations like clockwork in its quarterly earnings statements, and investors always love a happy surprise. GE, under Welch, was capable of churning out those good surprises with regularity.
The next CEO, Jeff Immelt, wasn’t so fortunate. Not only did Immelt take the helm at the beginning of a long bear market that stretched into 2013, but some accounting issues came to light that cast a pall over GE’s rosy results. The Security and Exchange Commission accused GE of violating accepted accounting practices in 2002 and 2003. And in the same complaint, noted that GE met or exceeded expectations on every quarter from 1995 to 2004. While it did not allege that GE was noncompliant during the Welch years, the conclusion is difficult to overlook.
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In 2009, GE agreed to pay a financial penalty of $50 million to settle the case, but did not admit or deny the violations.
GE stock reached its lowest point in 2008 and 2009, falling to less than $10 per share, and never truly recovered under Immelt. Investors saw modest gains as the economy improved after the Great Recession, but the stock never again reached $35 per share and now sits at nearly $18.
Should I invest in GE stock? GE’s dividend was one of the best reasons to invest in GE stock. The company’s 24-cent-per-share quarterly payout represented a 4.7 percent yield, which is a generous dividend — established value companies like GE are highly sought by dividend investors if they offer a yield of 3 percent or more. (The Dow’s average yield is 2.5 percent.)
But on Monday the company cut the dividend to 12 cents, or a yield of 2.4 percent, which Flannery says is necessary to give the company capital during its restructuring. “We understand the importance of this decision to our shareowners and we have not made it lightly,” he says. “With this action and others that we will be discussing this morning, we are acting with urgency to make GE simpler and stronger to drive growth and create more value for our shareowners.”
The company plans to focus on aviation, power and health care as it attempts to restore its past profitability. And that’s probably a good move.
But without the dividend to rely upon, GE likely won’t be a good investment for anyone who has a short (less than five years) investing window.
“I would wait on GE currently as the scope with which they are revamping the company will take some time to fully take hold,” says Matthew Lloyd, chief investment strategist of Advisors Asset Management. “The process of redirecting the company to a more singular point on the compass rather than one with 15 arrows all pointing in separate directions is not only time-consuming but a drain on the company’s energy. This will require time.”
But for investors who can afford to hold GE for a long time, the current price could provide an attractive return over time — if General Electric’s restructuring plan is sound.
[See: 7 Things to Look for in Dividend Stocks.]
“The stock is reasonably cheap at current prices, and I think anyone buying today will see decent returns over the next several years,” Sizemore says. “But trying to buy it today is a little like trying to catch a falling knife.”
And that game is always dangerous.
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General Electric Company (GE) Has a Long Road Ahead originally appeared on usnews.com
