General Electric Company (NYSE:GE) has reached peak Immelt, and the company built by the long-time CEO would not look familiar to Charles Dow.
Today’s GE is an infrastructure company. It makes turbines that create power, and engines that use it. Some of those are wind turbines.
The company moved to Boston, home of its huge GE Health division, last year, but that unit, too, is in the infrastructure business, making heavy equipment and the software to run it.
The stock’s move toward its 2015 high has been blunted, the dividend yield of 3% is not enormous, and operating cash flow for the last two quarters has been negative. If this is the best Immelt can do, maybe it’s time to try something else.
It’s a far cry from the company Immelt inherited in September 2001, a giant finance and entertainment unit built by Jack Welch. Immelt broke it up, sold most of the old pieces, then built a company whose returns impress no one.
Immelt’s Succession
Jeff Immelt turns 61 next month, and there has been speculation over his successor for more than a year. Welch spent seven years searching for Immelt before retiring at age 65. Immelt seems in no hurry to get started.
Whoever gets the job will have the power to transform the company again. Welch’s predecessor, Reginald Jones, built a huge consumer products company. GE has had only 12 leaders going back to 1892, and each has had full power to remake the company. It’s why the company has survived for so long, but also why periods like this one are so fraught.
Right now, there is no obvious choice. GE likes to keep someone in place for 15-20 years, so Vice Chairman John Rice seems too old at 59. Lorenzo Simonelli is in his early 40s, but he heads oil and gas, a huge division but one that may not inspire Wall Street confidence. CFO Jeff Bornstein is 50, but if Immelt hangs in until 65, as Welch did, he’ll be too old to make big changes when he takes over.
Promises, Promises
Under Immelt, GE has been an investment that over promised and under delivered. The stock is down 37% since Immelt’s succession, although he is right to blame the 2008 financial crisis, and most of GE Capital has since been sold.
Since 2009, Immelt might note, he has increased the dividend from 10 cents to 24 cents and the stock trades at over $30, up from less than $10 in early 2009.
Right now, its promise is Predix, an industrial Internet of Things cloud it features in advertising, along with a young software engineer named Owen, after Owen Young who chaired the company in the 1920s. (He can’t lift the hammer.)
But the present company is hard to recommend. While half its analysts rate it as a “buy,” expecting earnings of $1.66/share for 2017, that’s a forward price-earnings multiple of nearly 19, against a current P/E of nearly 32. Add that 3% dividend yield and you get a stock that must do great just to match the market.
If you’re a GE investor with a long-term horizon, meanwhile, you don’t know what you’re going to get. Immelt’s successor is likely to have a completely different vision for the company, just as Immelt had, and expect you to wait for years on a return from that vision, just as Immelt did.
Bottom Line on GE Stock
GE is what analysts call a widows-and-orphans stock. If you got in at the 2009 bottom it has delivered a solid return, but widows-and-orphans buy on their own schedules, and few were taking plunges on anything in 2009. GE’s stock gain over five years trails the averages.
A big run-up in energy prices will give some lift to the shares this year, but those prices are up 50% in the past year while GE stock is up just 10%.
It may be time for GE shareholders, starting with this one, to give up on Jeff Immelt.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in GE.
