In today’s look through the Dow Jones Industrial Average components, we’re evaluating American corporate behemoth General Electric (NYSE:GE). It would be impossible to list all the products and services GE has, but just to give you a taste — General Electric has its fingers in appliances, aviation, electrical distribution, energy, health care, lighting, oil & gas, rail, software & services, water, business and consumer finance and — well, just about everything.
The key driving factor for GE is the economy — and by that, I mean the global economy, because the company’s reach is as deep and broad as you’re going to find. The sheer degree of diversification in both its products and services, as well as its geographical reach, means the company is insulated from regional economic shocks.
Of course, given the global economic shocks of recent years, GE has not been left untouched. 2009’s net income was down some 40%. That might sound bad, but when you consider that meant net income was only $10.7 billion, well, it reminds me of that line from Citizen Kane: “You’re right, I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars next year. You know, Mr. Thatcher, at the rate of a million dollars a year, I’ll have to close this place … in 60 years.”
That is exactly how one should think of General Electric. It’s not going anywhere. The company’s net income run rate for 2011 is, indeed, $14 billion.
Stock analysts looking out five years on GE see annualized earnings growth at 15%, which is amazing considering how large a company GE is. At a stock price of $14.70, on FY 2011 earnings of $1.39, the stock presently trades at a P/E of 10.5. There really is no holding company that is similar to GE, so a valuation comparison really isn’t possible.
Just how strong are the company’s financials? Strong enough to make Charles Foster Kane envious. The company carries — hold on to your sleds — $136 billion in cash. It carries $277 billion in debt, which you might think would be untenable — except the company only pays an interest rate of about 6%. Trailing 12-month free cash flow was $21 billion, and that is after debt service. The company also had four times the amount of free cash flow necessary to pay its 3.9% dividend. Four times more than what they need!
Wouldn’t you know it, there have been five insider purchases totaling 103,553 shares during the past two years, including 40,000 shares by CEO Jeff Immelt in March.
I think GE is deserving of a premium beyond the 15 P/E for its five-year growth rate, but let’s say it doesn’t, to be conservative. On projected 2015 earnings of $2.53 per share, factoring in the 3.9% compounded dividend yield reinvested, we get a price target of $38. This is a no-brainer.
- I believe General Electric is a buy for regular accounts.
- I believe General Electric is a buy for retirement accounts.
Lawrence Meyers owns shares of GE. Check out Meyers’ take on other Dow Jones stocks here.