Investors should consider holding diversified companies as part of their investing strategy. These conglomerates operate in multinational jurisdictions, don’t rely on a single sector for revenue and in some cases, pay out a regular dividend.
General Electric Company (NYSE:GE), whose shares are valued at just 15.7 times forward earnings, has a dividend yielding 3.2%.
Its long-term debt (of 1.39x equity) is more than manageable. If GE stock dips more, this is the stock to consider. In the third quarter, General Electric was third only to Microsoft Corporation (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL) in buying back shares.
In Q3, the company bought back $3.7 billion. Apple repurchased $6 billion, while Microsoft bought back $4.4 billion. GE returned $30.5 billion to shareholders last year. This included a share buyback of $22 billion.
The company is not a favorite pick among the analysts, despite the respectable General Electric dividend. JPMorgan added GE stock as a top stock to avoid, citing sub-par core operating performance.
Investors need not pay any attention to analysts there. General Electric has strong leadership under CEO Jeffrey Immelt. It is embracing technology by focusing on the Internet of Things with its “smart machines” development.
Growth Potential of GE Stock
General Electric’s move to merge its oil and gas services business with Baker Hughes Incorporated (NYSE:BHI) is a net positive.
The energy sector is uncertain and it faces slow growth. Despite the challenging oil and gas market ahead, GE stock still kept up with its pace of dividends and share buybacks. On its fourth-quarter conference call, General Electric said the sector is stabilizing:
“In oil and gas, the environment continues to be challenging and activity levels remain muted, external market indicators appear to be stabilizing with expected more balanced supply and demand fundamentals, partly influenced by the recent OPEC production agreement. U.S. onshore rig count grew 33% versus the third quarter, but was essentially flat versus the beginning of the year.”
Although orders fell 27% year-over-year, GE forecast no change in E&P spending. If the oil and gas market bottomed late last year, the company will start seeing orders growing at its Alstom unit.
The offshore drilling and sub-sea will still be a drag this year. General Electric hopes business picks up in North America onshore. It also needs the Middle East and Europe to stabilize. If that does not happen, this segment will not meet the company’s expectation of a smaller revenue decline in the second half of the year.
General Electric’s Earnings Outlook
The 2017 earnings-per-share forecast of $1.60 to $1.70 a share may prove too low an estimate for GE stock. In the meantime, management is continuing with its plans on returning between $19 billion to $21 billion to shareholders this year.
General Electric reported respectable growth in many of its units. For example, revenue at HCS (health and life science) grew by 2 %. Immelt expects Aviation to grow again this year. GE is also improving its operating efficiency. A new IT structure that runs horizontally will save the company around $450 million.
Investors shouldn’t only consider General Electric the bellwether of the U.S. economy’s health, as its prospects also depend on the health of the world economy. A strong ISM manufacturing index number, which hit a two-year high, is just a one indicator suggesting GE stock’s outlook is bright.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
