If there’s any old dog that can learn new tricks, it would be General Electric Company (NYSE:GE). GE has an intriguing back-story. Shortly after Thomas Edison invented the incandescent electric lamp, he distributed products based off this invention through his Edison General Electric Company. But competition with rival Thomson-Houston Company denied business expansion through their respective patents and technologies. Combining forces, the new organization was named General Electric, and the rest is history.
Unfortunately, many of the good reasons for owning GE stock also became history. Sure, it’s an American icon, and it can be reasonably trusted to last another century.
It’s led by an enthusiastic executive management team that has a bold vision for the future. General Electric stock also has a fairly generous dividend yield of 3%, which is a lot better than many companies are divvying out these days. At the same time, the paradigm in which GE was at its prime has faded away.
No longer can investors call upon GE stock to provide consistent double-digit returns. From 1970 through 1999, shares returned an average of almost 22%. That’s a remarkable 30-year run that only a few companies like Nike Inc. (NYSE:NKE), Apple Inc. (NASDAQ:AAPL) and Walt Disney Co (NYSE:DIS) can claim to best. But since the twenty-first century, General Electric stock has only mustered an average of 3% returns.
That’s going to be a problem when it comes to selling GE stock to a new generation. Even in a basket of “safe investments,” you’re going to need to do better than barely beating inflation. And let’s be real — while dividends are nice, 3% isn’t much to write home about.
Bold Plans for GE Stock
Nevertheless, GE is embracing the challenge. During a corporate presentation earlier this month, CEO Jeff Immelt declared an ambitious earnings-per-share target of $2. Roughly speaking, the EPS for General Electric stock over the last ten years is averaging $1.27 per share. Analysts are expecting this year to come in around $1.50 a pop. Either way you look at it, that’s bold stuff coming out of GE stock.
However, there’s real meat on the table for investors. The oldest trick in the book to boost earnings on paper is of course the share buyback. While it doesn’t lead to “real” gains for the company, it does increase shareholder value for GE stock. Also, the industry giant is in a much more comfortable position to do so. The balance sheet has been shored up, resulting in a strong cash position against sharply declining debt.
But the most substantive impact towards earnings growth will come from a radical shift in the GE strategy. The contrast is striking. General Electric stock was ultimately formed through an investiture of two competing entities. Now, in order for GE stock to survive in the age of the Millennial, it must aggressively engage in divestiture.
The company is dead serious about their new direction. For example, GE stock will no longer carry the massive exposure to the crude oil markets they once did. By combining its fossil fuel operations with Baker Hughes Incorporated (NYSE:BHI) and spinning it off as its own publicly traded entity, GE has better control of an unreliable asset. Although major oil indices are steadily recovering, prices are still well off from its highs of 2014. Additionally, there’s no telling when the next crisis may occur.