When it comes to blue chips, General Electric Company (NYSE:GE) is as blue as they come. The industrial giant has been a portfolio staple for decades and has powered generations of investors with long-term gains and a steadily rising dividend.
However, all of that changed during the credit crisis and Great Recession. GE was hit hard as a variety of non-manufacturing businesses suffered. Its long-standing dividend was cut and GE stock took it on the chin.
In the months since, GE has re-imagined itself and has gotten back to basics. Perhaps more importantly, General Electric is now back on sure footing and could be a huge buy for long-term investors. But, don’t just take our word for it — here are five bullish reasons to buy GE stock today
Top Five Reasons to Buy GE Stock
A Focus on Manufacturing: For General Electric, the problems during the Great Recession weren’t industrial ones, but financial ones. As in GE Capital. During former CEO Jack Welch’s tenure, GE Capital became the dominate force of the company’s profit and revenue. This turned problematic during the recession, as many of the various bonds, loans, real estate holdings and other assets became strained. The issues were so bad that GE was forced to cut its once-lucrative dividend.
But, that was then and this is now. Since the recession, General Electric has continued to reduce the amount of influence of GE Capital on its bottom line. That’s included selling off its vast real estate holdings to private equity manager Blackstone Group LP (NYSE:BX), spinning-off its consumer/store-branded credit card arm as Synchrony Financial (NYSE:SYF), as well as selling much of its underlying loan exposure.
In the end, today’s GE stock is more like the GE of old. Manufacturing of advanced high-engineered goods is the new mantra for GE and that will less bumpy growth down the road.
GE Stock Is Really a Tech Stock in Disguise: Beneath that heavy machinery is fair bit of high technology and coding. That’s because GE is working on creating the “factory of the future.” Over the last few years, General Electric — through GE Digital — has made a series of acquisitions and buyouts to help launch its Predix software suite.
Predix uses complex sensors across various pieces of machinery — like a jet engine or conveyor belt — and then AI software to analyze the billions of bytes worth of data. Looking at all the data generated, it was done to help with maintenance time, operational efficiencies and other cost-saving strategies. Cloud computing and SaaS applications allow users to access all of this information on the fly and make changes as necessary.
Already, Predix has been a hit with customers, generating about $6 billion in revenue for GE stock this year. However, General Electric estimates that Predix will bring in more than $15 billion by 2020. In the end, GE has positioned itself to be the kingpin of the industrial Internet of Things (IIOT).
GE Oil & Gas Gets Bigger: Halliburton Company (NYSE:HAL) should be shaking in its work boots. After the Feds spurned its deal to merge with rival Baker Hughes Incorporated (NYSE:BHI), GE picked up the phone. In the end, that’s a huge win for GE Oil & Gas and BHI stock holders.
The two companies offer some similar, but mostly complementary, oil services. With that in mind, the merger will create the second-largest oil services company and control $34 billion in assets with projected yearly revenue of $25 billion.
That will vault it ahead of HAL by a decent margin. Analysts project that the deal will be accretive to GE’s earnings per share by 4 cents by 2018 and 8 cents by 2020.
However, the real benefit could come down the road. CEO Jeffery Immelt has hinted at spinning off the unit down the road. That tax-free spinoff has been estimated to be worth approximately $69 per share. But, it also could serve as a blueprint for GE’s various other divisions. That could provide plenty of gains and opportunities for GE stock owners down the road.
Dividend Is Back on Track: After cutting its payout during the recession, General Electric stock is a dividend growth story once again. Removing the “junk” from its balance sheet and focusing on high-tech manufacturing has paid off. GE recently upped its payout and has now increased its dividend 2,300% since cutting it during the recession.
All in all, the company plans on returning approximately $30 billion to shareholders this year. And, with a low payout ratio of around 45%, GE still has plenty of room to keep raising payouts like the General Electric stock of old.
GE Stock Is Still Cheap: Finally, GE still remains a value among industrial stocks. On a trailing P/E basis, GE seems quite expensive with a P/E ratio around 32. However, on forward basis, and with its projected five-year earnings growth of over 12%, the value in GE begins to be seen.
Shares of GE stock can be had for a forward P/E of less than 19. That value only grows when you factor in potential dividend growth and the spin-off potential from its energy unit and other business. In the end, the longer-term picture seems rosy for investors who choose to buy GE stock today.
The Bottom Line
General Electric seems to have overcome its issues. The focus on manufacturing and services revenue has seriously helped GE stock get its mojo back. Meanwhile, a rising dividend, cheap valuation and potential spin-offs will continue to drive GE’s valuation higher over the next few years. For investors looking at General Electric stock, the time to buy could be now.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.