General Electric Company (GE) stock has long been one of the market’s most reliable picks, but are the engines behind one of America’s most iconic industrial leaders still running smoothly?
From its steady dividend to its long-term growth and diversity of business segments, GE stock has appealed to a broad spectrum of investors, but it hasn’t been immune to 2016’s rocky road in falling more than 2% year-to-date.
Yet, don’t let that scare you away: General Electric has made a sharp turnaround over the past month and has posted outstanding growth over the past year.
While the company is heading into a time of change, this stock’s long-term outlook is as strong as any of the market’s picks.
Let’s take a look at why GE stock deserves a place in any investor’s portfolio.
GE Stock: Strength in Diversity
If anything is weighing on General Electric stock, it’s the obvious: Oil prices.
Oil’s nosedive has taken the energy sector on down with it, including GE’s sizable oil & gas segment. The business (General Electric’s fourth-largest by sales) saw a nearly 14% drop in year-over-year revenue in 2015. It’s the primary reason why the corporation missed on sales expectations in its most recent earnings report, despite continued strength in its larger aviation and power segments.
Oil prices aren’t heading north any time soon, and with that, don’t expect this business to add much of any growth to GE stock in 2016 — or beyond.
But General Electric’s diversity is its strength. Its broad business model means a significant drop-off that would cripple another company barely slows this behemoth down. Take the aviation sector: The drop in oil prices is a fall in one of airlines’ biggest costs, boding well for GE’s formidable aviation unit.
The business is the corporation’s largest by sales, making up more than 22% of total industrial segment revenues last year and notching YOY growth of 2.7%. Given aviation’s projected steady growth globally, this area is one for investors to keep an eye on — and one that will power GE stock’s performance for years to come.
This kind of slow-but-steady buildup might not appeal to those looking for huge profits in the short term, but when building wealth over many years, General Electric’s strategy and breadth of businesses makes this stock far less susceptible to sharp market downswings. There’s a safety in size: Where one segment may falter — as in the case of its oil & gas unit — others pick up the slack.
For the less growth-oriented investors, GE stock offers a healthy dividend to fall back on.
It’s hiked its dividend for six straight years, and with a yield of 3.1%, General Electric shares are a foundational piece of an income investor’s long-term portfolio.
Yet, GE is changing in big ways as it looks to a leaner, more flexible future — and that’s a good thing for savvy investors.
Change in the Air
General Electric might be broad, but CEO Jeff Immelt’s slimming down the company to focus on what GE does best — and transitioning this industrial giant into a high-tech, digital future.
Most immediately impacting to GE stock is the company’s recent flurry of acquisitions, sales and divestments. Spinning off much of the company’s financial division into Synchrony Financial (SYF) last year and selling a number of other financial assets was a huge setup in a plan to return up to $90 billion to shareholders.
That’s a short-term boon for General Electric stock that pays off even bigger in the long term, allowing GE to pivot away from non-core business like finance to focus in on its industrial segments in an aim to boost profitability. The result is a less bloated, more streamlined company that still maintains its broad diversity of businesses.
The company added to that goal in completing its purchase of Alstom’s (ALSMY) power division last November. Immelt noted in GE’s most recent earnings release that Alstom’s acquisition boosted the company’s backlog in the fourth quarter as part of an 18% YoY backlog jump.
While Alstom didn’t add to the company’s per-share earnings in its most recent quarter, the acquisition offers great potential for General Electric’s power and renewables divisions.
GE Bets on IoT
The biggest change that will affect GE stock’s future, however, is Immelt’s push for digitization and the rise of the Internet of Things — the digital, data-driven industrial and commercial network of physical objects, products and devices.
Immelt hopes to utilize analytics and the wealth of data provided by the Internet of Things and smart grids to boost margins and efficiencies, another asset to General Electric’s focus on its core industrial segments that should pay off for years to come.
Change is in the air around of the market’s most reliable companies, but equity in General Electric is as solid a rock for the long term.
While oil prices have taken a chunk out of the company’s oil and gas unit, General Electric’s aviation business is flying high, with a focus on slimming and growing more efficient. That looks to pay big dividends in the future.
So while 2016 might not hold material rewards for GE stock, General Electric Corporation is poised to remain an island of security and steady profits in a market where volatility so often abounds.
As of this writing, Dan Carroll did not hold a position in any of the aforementioned securities.
