4) Strategic acquisitions – The Company is planning to make strategic acquisitions whose size does not exceed $4 billion. However, the dilutive effect of shrinking the Finance operations will more than overshadow the acquisitions portion of GE’s growth strategy.
5) Increasing demand for its core products and services – As the economy keeps expanding, and as the company brings in new solutions to its existing markets, chances are very high that revenues will be increasing over time. In addition, GE expects that the industrial segment should account for 70% of earnings by 2015, from 55% at present levels.
6) Scale – The scale of the company operations makes it more difficult for competitors to match General Electric, given the breadth of business units over which it could spread costs for R&D and expenditures. In addition, business units in different sectors can leverage best practices that are learned in other sectors.
7) Macro trends – The increased buildup in global infrastructure, growth emerging markets such as China etc.
The company is reducing is reliance on GE Finance for its long-term growth, which is based on the difficult lessons it learned during the financial crisis. This is going to reduce earnings per share growth by anywhere between 0 to 5%/year for the next few years. I generally do not like to see shrinking in the major profit generators of a business, which account for 1/3 of profits. However, this seems to be offset by growth in other areas such as Industrial for example.
General Electric constantly changes the mix of businesses under its umbrella, a strategy pioneered by former CEO Jack Welch. The company tries to be number one or two in a given sector, and is also looking for growth in that segment of the business as well. As a result of this policy, one of the most important factors to evaluate with General Electric is management. They have to be able and honest, otherwise the capital allocation decisions they make could have a pretty bad outcome on your investment.
Overall, I believe that Jeff Immelt to be a decent manager, who unfortunately was dealt two bad cards. He took reigns at GE at a time when the stock was very overvalued in 2001, and he also managed to preside over the worst recession since the Great Depression. Of course, the culture at General Electric is another important advantage for the company. If you are a long-term holder, you should realize that you are betting more on management to make the smart decisions on which businesses to keep, which to buy and which to dispose of in an intelligent manner. As a result, the type of business units within General Electric would be different 20 – 30 years from now.
Despite the fact that the company has only raised dividends for four years in a row, it looks attractively priced today at 16.50 times estimated 2013 earnings and a nice yield of 2.80%. I would be the first one to admit that it looks like a decent value at current levels.
In addition, it also looks like the company is recovering and earnings per share could grow at 4-7%/year for the next five years. It is very likely that GE should do fine for a long-term holder with a 20 – 30 year horizon. Depending on the availability of ideas at the time of capital availability, I would consider GE for potential inclusion to my dividend portfolio.
Of course, if I find a company that has grown dividends for ten years in a row, yields around 3%, sells for less than 17 times earnings, and can grow dividends by 6 – 7% per year for the next five years, chances are I might choose the other company instead.
Full Disclosure: Long ABT and MTB