Why General Electric Company (GE) Stock Isn’t a Deal Worth Looking At

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The merger between Baker Hughes Incorporated (NYSE:BHI) and the oil and gas unit of General Electric Company (NYSE:GE) is expected to close by the end of the summer. Long-term holders of GE stock are excited about this deal, in part, because it furthers the company’s return to its industrial roots.

Why General Electric Company (GE) Stock Isn't a Deal Worth Looking At

While this might be true, it’s not a very good reason to own a stock, especially one like General Electric, which has underperformed its peers and the S&P 500 by a wide margin over the past decade — GE stock has a 10-year annualized total return of 0.05% compared to 7.2% for its peers and S&P 500 — and it has a CEO who should have been sent packing years ago.

GE Stock: Oil and Gas Is the Key

If you’re long GE stock you’re probably convinced that once General Electric’s oil and gas business merges with Baker Hughes, higher oil prices combined with $1.6 billion in projected synergies by the year 2020, the unit (GE will own 62.5%) will produce significant profits for the company.

While it remains to be seen if both of these things actually materialize, for now let’s assume that they do. How much will this change the trajectory of GE stock?

Well, potentially quite a bit.

General Electric has said the deal adds as much as $0.08 per share by 2020 on projected revenues of $34 billion. However, the merger still needs the greenlight from the federal government.

“If approved, the GE-Baker Hughes merger will create a lean, mean [$32 billion] oilfield services company to rival Schlumberger and Halliburton — one that has at its disposal the very latest digital technology — and could pave the way for similar mega-deals as companies  pool resources to see out the downturn,” OffshoreTechnology.com contributor Julian Turner wrote in January.

While $0.08 might seem like a lot, analysts estimate GE’s 2019 earnings will be $2.12 per share. Assuming 10% earnings-per-share growth in 2020, we’re talking about less than a 4% increase. However, on the upside, GE is only spending $7.4 billion ($17.50 special dividend to Baker Hughes shareholders) to deliver the additional earnings.

Analysts in general are positive about GE stock giving it a median 12-month target price of $32.50, 14% higher than its May 10 closing price.

The Opportunity Cost of General Electric

Dividend investors love this stock because of its juicy 3.3% yield, but also because of its iconic nature in U.S. business history. I get all that. If you’re a long-time GE shareholder, I doubt you can be swayed by anything I might say.

So, let me direct this toward current Baker Hughes shareholders who stand to get $17.50 in cash once the deal is closed along with a 37.5% pro-rated stake in the publicly traded company.

Activist investor Nelson Peltz is pushing General Electric to buyback more shares through the use of debt. By spinning its oil and gas business into a separate publicly traded company with Baker Hughes, GE is offloading its current oil and gas debt along with any additional debt required to grow that business, onto the new balance sheet.

Increased share repurchases don’t guarantee that GE stock will move higher. It’s especially true given the markets continue to value its stock at a lower multiple than some of its peers primarily because of Jeffrey Immelt.

Until Jeffrey Immelt is out of the way, no amount of creative financial maneuvering is going to change the opinion of investors. When, and if, you get your $17.50, I would not roll that into General Electric stock because the opportunity cost of doing so is real.

Bottom Line

GE stock isn’t going anywhere until the man at the top is pushed to the sidelines. Some suspect Immelt will retire after the deal closes. For GE shareholders, I sure hope so.

Until then, I’d look elsewhere.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/general-electric-company-ge-stock-isnt-deal/.

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