Former General Electric (GE) CEO Jack Welch had a simple business mantra: “A company should be either No. 1 or No. 2 in a particular industry, or else leave it completely.” It seems current CEO Jeff Immelt agrees.
The venerable industrial manufacturer seems to be leaving the world of finance, distancing itself from GE Capital by getting back into the business of building physical things. To that end, GE seems to be evoking the spirit of its founder, Thomas Edison, by plowing headfirst into one of the most important markets and sectors of the future.
Namely, the energy industry.
GE continues to make all the right moves — either through internal development or bolt-on acquisitions — to become a contender across the entire energy value chain. Its latest commitments in the space highlight just how serious General Electric is at become a major player in the energy industry.
For investors, GE’s return to its roots as an energy focused-manufacturer could make GE stock the right play to put some energy back into your portfolio.
Hefty R&D Spending From GE
Immelt has already made good on his promise to make industrial operations a bigger piece of earnings and profits of GE. So far, GE has made good progress of shrinking its financial arm (GE Capital) and recently begun the process of spinning off its North American consumer finance/credit card unit via an IPO. These moves follow GE’s recent sale of its media holdings (NBCUniversal) to Comcast (CMCSA) last February.
The key is that GE plans to use the proceeds of these noncore businesses to strengthen its industrial operations.
That includes earmarking an additional $10 billion through 2020 for its “Ecomagination” budget. This spending, which is in addition to its normal capex budget, will be used to focus on developing energy resources to help companies save money and reduce their environmental impact. Aside from more traditional energy-efficiency measures, GE plans on using the R&D spending to replace the millions of gallons of water used in the hydraulic fracturing process. GE will partner with Norway’s Statoil (STO) to see if carbon dioxide can be used as an alternative to water in order to carry proppant down into shale rock.
Aside from this special capex spending, GE has been boosting its presence in the energy business through various energy-related acquisitions. GE became the world’s largest wind turbine manufacturers after it bought Enron’s wind business in bankruptcy. And just last year, GE purchased Lufkin Industries. That deal made GE the premier purveyor of oilfield pump-jacks and artificial lifts. General Electric has also become one of the leading suppliers of subsea “Christmas trees” and other equipment due to various other bolt-on buys.
So far, General Electric has spent around $14 billion on acquisitions since 2007 to boost its presence in the oil and gas business, while its Ecomagination spending has produced roughly $160 billion in revenue for GE stock.
Ultimately, GE is going back to its roots as a real deal manufacturer and that’s a big deal for GE shareholders.
Time to Buy GE Stock
General Electric’s continued foray into all varieties of the energy market is one of the best reasons to pick up shares of GE stock. As it shifts its focus away from the volatility associated with GE Capital’s current form, this energy spending and concentration will be the main driver of big profits down the road. And the fact that GE isn’t just thinking about producing more energy, but doing that production in a more efficient and cost-effective manner is the crucial win for GE stock and its shareholders.
And already, we are beginning to see the wins for GE stock.
Operating earnings for GE jumped around 20% on year over year basis during the fourth quarter. The key driver for that profit boost was sales at GE’s energy businesses.
Meanwhile, GE paid out roughly $18.2 billion to investors via share buybacks and dividends. GE has continued to strengthen its dividend payouts since the depths of the Great Recession as it’s focused more on industrial applications. Currently GE stock yields a hefty 3.5%, but that will increase as its energy businesses continue to add more to its bottom line.
And given its continued growth potential in the energy sector, GE stock is a steal at a forward P/E of around 14.
The bottom line — General Electric is returning to its roots with a hefty dose of energy spending. That will in the long run lead to plenty of gains for investors in GE stock.
At the time of publication, Levitt had no positions in the stocks mentioned.