Long-term investors are aware that industrial powerhouse General Electric Company (GE) has been dead money for quite a long time.
Over the past decade, GE stock has been one of the worst performers in the Dow Jones Industrial Average, and is currently trading 5% below where it stood 10 years ago. Meanwhile, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) racked up 60% gains over that timeframe.
But it’s not like General Electric is a bad business. No, it has the 2008 global financial meltdown, which caused GE stock to tank almost 70%, to blame for the anemic long-term returns.
Luckily, GE stock has since managed to climb more than 160% post-financial crisis, and is currently trading at an eight-year high.
No Longer a SIFI
General Electric has restructured its operations to refocus on its core industrial strengths. Since its founding 124 years ago, General Electric has evolved into a complex industrial conglomerate through a mixture of innovations, acquisitions and reorganizations. But what has been disconcerting for investors is the fact that GE has in the process gained a huge exposure to the high-risk banking and consumer finance business through GE Capital.
But GE has worked hard to lighten up on the consumer-lending business. The company has already achieved its goal to sell off at least 90% of the lending business, including spinning off Synchrony Financial, its private label credit card company.
The credit business, which is deemed too risky in a recession due to high default rates and massive bad debt write-offs, has been dragging down the valuation of GE stock. The company recently had its Systemically Important Financial Institution designation rescinded by the U.S. Financial Stability Oversight Council, a big milestone in the company’s efforts to become leaner and meaner.
And now, GE is doubling down on its digital and software operations. General Electric plans to invest more than $1 billion in its fast-growing software business. General Electric sees the digital business as an essential compliment for its core industrial business and says that it plans to use software and sensors to boost the reliability and efficiency of industrial equipment such as jet engines and gas turbines.
Further, GE is betting big on its Predix operating system, which companies can use to enhance their GE applications and products. CFO Jeff Bornstein sees Predix sales reaching $4 billion in 2020, up from virtually zero currently. That estimate does not appear to be a stretch when you consider that GE recently signed a deal with Microsoft Corporation (NASDAQ:MSFT) to bring Predix to Azure, the most popular public cloud for enterprises. Predix is currently available on Amazon.com, Inc.’s (NASDAQ:AMZN) Amazon Web Services and Oracle Corporation’s (NYSE:ORCL) cloud.
Overall, GE sees digital operations revenue growing 2.5 times by 2020 to $15 billion up from $6 billion currently. But even more significantly for GE investors, the high-margin digital operations are expected to contribute as much as 25% to GE’s bottom line in a few years’ time.
And that’s great news for the company’s dividend growth.
GE Stock Pays Dividends
Many investors still love GE stock, and for good reason. Being a giant industrial conglomerate, GE fits the mold for different stripes of investors: some love it for its unique energy plays, others for its oil/gas plays while others simply love GE for its outstanding innovation culture. But ultimately, the biggest reason many income investors swear by GE stock is because of the company’s impeccable dividend payout record.
General Electric is a true dividend aristocrat, with an uninterrupted dividend payout record that stretches back more than a century. General Electric has also grown its dividend for 32 years in a row.
For GE, the dividend comes at the top of its cash allocation priorities, bar none. The current dividend yield of 2.86% is above the Dow Jones’ average yield of 2.78%. The company’s yield has consistently remained above 3% for years, and has only recently fallen below that watermark because GE stock has climbed an impressive 20% over the past 12-months.
General Electric has committed to return more than $90 billion to shareholders between 2015-2018, with $35 billion of that being dividends. A lot of that is being financed by the businesses that the company is selling.
But for the company to keep growing its earnings and dividends sustainably over the long term, General Electric needs organic growth. The digital business provides a new growth runway for the company to do just that.
It’s time for long-term investors to double down on the digital-minded General Electric stock.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
