General Electric Company (NYSE:GE) is probably America’s most famous industrial company. However, its various adventures during the financial crisis revealed a different, riskier side of the firm.
Since General Electric’s near-failure in 2008, the company has made massive changes. It has been dumping its finance and credit-related divisions left and right. It has sold or spun off various units. And it continues to acquire other divisions.
While most investors are familiar with General Electric on the surface, let’s take a deeper look at the 2016 version of the company.
The Business of GE Stock
Currently, General Electric operates two fundamental divisions: capital and industrial. In April of last year, GE announced its exit plan to jettison the capital division. It seeks to wind down the capital arm and operate a much smaller financial division within the industrial segment.
GE spun off Synchrony Financial (NYSE:SYF), its old credit-card-issuing division, as a big part of this process. Asset sales out of GE Capital allowed the firm to return $25 billion to GE stock owners via dividends and share buybacks in 2015.
By the end of 2016, GE aims to exit the capital division and stop being a systemically important financial institution.
With the problematic finance arm shrunk, GE intends to focus back on what made it great: industrials. The industrial unit comes with eight divisions: power, energy management, renewables, oil and gas, aviation, healthcare, transportation and lighting.
The firm is heavily focused on energy and electricity, though, with a strong presence in both oil and gas and renewables, it should prosper regardless of which direction energy policy goes in coming years.
The aviation business is another key factor. This unit, largely on the strength of GE’s aircraft engines, is second-largest within the company by revenue, and is the most profitable.
Financial Performance
Judging GE’s financial performance is a bit tricky. The company’s business is in a state of complete overhaul, so it’s relatively hard to make year-to-year comparisons. That said, the core industrial unit hasn’t shown much progress lately. Revenues fell one percent in 2015 versus the previous year. Additionally, the industrial segment appears on pace to show a mid-single digit decline in revenues in 2016.
Overall, last year’s GE brought in $117 billion in revenue. While that’s still a lot, it’s the second-lowest figure the company produced since the turn of the millennium. Only in 2003 did the company manage less revenue.
The company is clearly in a shrink-its-way-to-excellence program.
The recent controversial acquisition of France’s Alstrom energy business helps stop the slide the revenue, but raises its own questions. General Electric is not firing on all cylinders at the moment. While there’s plenty to like in the future, especially the GE Digital initiative, it could be a slow couple of years before things heat up.
Balance Sheet
While GE has operational issues to resolve, no one is questioning its balance sheet. The company currently has more than $90 billion in cash and short-term securities on its balance sheet.
Beyond that, it has a strong collection of assets and is not heavily leveraged. This gives the company a great deal of strategic flexibility. It can make other large acquisitions, pursue aggressive internal growth or do whatever else may prove advantageous as conditions evolve.
For now, the company is supporting GE stock with an aggressive share buyback. Over the past year, it has bought back fully 10% of the total quantity of outstanding GE stock. Going forward, the buyback continues. On top of that, expect the dividend, currently frozen, to be hiked again no later than early 2017. GE stock already yields a solid 3.1%. The probable next dividend hike up to 25c/quarter would take the yield to 3.4%.
GE Stock: A Good Value?
Since General Electric is undergoing a business transformation, it’s hard to pin an exact value on GE stock today. That said, while it is challenging to value GE on its own, we can compare it to other industrial firms.
Compared with U.S. peers, including Emerson Electric Co. (NYSE:EMR), Honeywell International Inc. (NYSE:HON) and Danaher Corporation (NYSE:DHR), General Electric generally looks expensive. On both an earnings basis and EBITDA basis, it is as expensive or more expensive than all those peers. However, should analysts’ earnings outlook for 2017 prove correct, General Electric would move back toward the median price-to-earnings ratio within its industry.
The one place where GE stock does stand out is with its dividend yield. Among industrial peers, General Electric is a rare one offering a more than 3% yield. Of the large U.S. industrial firms that most directly compare to General Electric, only Emerson Electric can match GE stock’s current yield.
Verdict
General Electric appears set for an exciting future. They’re refocused operations on what made them great, while unloading the riskier financial assets that hurt the firm during the financial crisis.
That said, GE stock probably has limited upside over the next year, as investors wait for the company to deliver on its promise.
With its strong balance sheet and healthy dividend, an income investor can hardly go wrong owning GE stock here. However, other industrial firms may offer more stock price appreciation in coming quarters.
At the time of this writing, Ian Bezek owned stock in Emerson Electric. He has no position in GE stock. You can reach him on Twitter at @irbezek.
