General Electric: An Excellent Long-Term Investment

General Electric (GE) has had a tumultuous year, yet should not be dismissed as an investment, despite the plunge its share price has undergone.

How has this venerable blue-chip stock fallen 45.39% from its 52-week high of $32.04? A number of factors have hit General Electric in the past few months. The first major issue was the third quarter performance report showed that EPS was projected to be $1.05-1.10, down from the estimated $1.60-1.70 that was reported in the second quarter. While most of General Electric’s segments were actually performing well, the power generation segment was weak, and the oil and gas segment was compromised by weakness in its markets, and this weakness led to the earnings outlook being slashed.

The second major issue was the 50% dividend cut that took effect from December, which was implemented to address the fact that General Electric’s free cash flow had contracted to $7 billion, falling from roughly half its normal level. This is the second time in less than a decade that General Electric has had to cut its dividend, and it is clear that management was aware of how badly this announcement would be received. CEO John Flannery stated that:

We understand the importance of this decision to our shareowners and we have not made it lightly… We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation… Fundamentally, that dividend was predicated on us growing to a certain level that we just did not see happening in terms of industrial cash flow.

General Electric’s public perception has not been helped by the Wall Street Journal’s report about Flannery’s predecessor, Jeff Immelt, allegedly having an empty business jet trail his corporate plane on various international trips that he made. The resulting perception of self-indulgent management cutting costs that adversely affect shareholders has been a black eye for the firm too. All of these factors account for the bearishness surrounding General Electric. Indeed, Mad Money’s Jim Cramer has apologized for recommending the stock as its price went down:

Sometimes, you just get had, and I got had. I was wrong about GE. That’s my fault. I shouldn’t have recommended it on the way down… We’ve got a new guy in town, Flannery. I think he’s trying to put it together, trying to get it together, so I would not sell it. But I cost people money because I believed, and I’m ashamed.

Cramer may be remorseful about recommending the stock, but he does not see it as a sell. Nor do I, and I see several good reasons for optimism about General Electric going forward. The major issue that General Electric has had over the past decade is the following: the sheer size and diversity of its operations (Aviation, Capital, Energy Connections and Lighting, Healthcare, Oil and Gas [merged with Baker Hughes (BHGE) in mid-2017], Power, Renewable Energy, and Transportation) provides it with the expertise and resources to take on large contracts that most companies simply could not contemplate; this size and diversity, however, makes for a sprawling, difficult-to-manage conglomerate.

That is the key reason why a great deal of streamlining has occurred with respect to General Electric in recent years. The Capital segment has undergone significant reduction since the Great Recession, with the separation of Synchrony Financial (SYF) from the company in 2015. Flannery has also stated that his restructuring will see further divestments for low-performing segments such as Lighting and Transportation. The 62.5% stake in Baker Hughes also may be divested as early as 2018, according to Deutsche Bank (DB) analyst John Inch.

 

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