General Electric Company (GE) Stock Isn’t Worth the 3.2% Yield

Over the years, Baby Boomers across the country have flocked to General Electric Company (NYSE:GE) and GE stock because of its consistent dividend. In fact, a 2015 report from TD Ameritrade showed that GE stock had the second-highest ownership of any stock among its clients 50 or older. Only Apple Inc. (NASDAQ:AAPL) has a higher allocation.

General Electric Company (GE) Stock Isn’t Worth the 3.2% Yield
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It seems boomers — and every other age group, for that matter — love the fact that GE has increased its annual dividend in eight out of the last 10 years. Now paying 96 cents on an annual basis for a 3.2% yield, it’s awfully tempting to remain invested in one of America’s oldest and most iconic companies.

Jeffrey Immelt has remade the company, moving it out of financials and further into industrials where it got its start. It’s a blue-chip stock if there ever was one, producing a positive annual total return in four out of the last five years.

InvestorPlace contributor Josh Enomoto wrote about GE stock recently:

I’ve made this argument before, but it really comes down to your end goal. If you’re looking for a hot growth stock, look elsewhere, please! If you want to bide your time and not rock your portfolio with risk, GE stock is a prudent choice.

Amen to that.

But, that’s not the same thing as saying GE’s 3.2% yield is the reason you should own its stock. I believe you can do better without sacrificing income or capital appreciation.

A Better Choice Than GE Stock

The stock that comes to mind is Boeing Co (NYSE:BA), which has a dividend yield of nearly 3.5%, almost 30 basis points higher than GE.

Over the past five years, Boeing has generated an annual total return of 19.1% through January 31, 650 basis points clear of General Electric. Year to date, it’s up 5%, which is 11 percentage points higher than GE.

How does it look if we take out the best and worst years between 2012 and 2016? GE stock actually comes out on top, with an average annual total return of 17.5%, or 760 basis points higher than Boeing.

The big difference was 2013, when BA stock almost doubled due to investors recognizing the overall strength in its commercial jets business, as well as the improving profits in its defense business.

Fast forward to 2016 and Boeing’s business has remained strong.

CEO Dennis Muilenburg said:

“We led the industry in commercial airplane deliveries for the fifth consecutive year, achieved healthy sales in our defense, space and services segments, and produced record operating cash flow. … Looking forward, our team is intent on accelerating productivity and program execution to deliver increasing cash and profitability from our large and diverse order backlog of nearly $500 billion …”

At the end of the day, Boeing had a good year in 2016 generating $7.9 billion in free cash flow, a 14.5% increase year over year, which translates to a 7.8% FCF yield.

GE’s free cash flow situation is a much more complicated affair, however,

If you include the $20.1 billion in dividends received from GE Capital, its free cash flow in fiscal 2016 was $26.2 billion which is an FCF yield of 10% based on its market cap of $260.4 billion. That’s clearly better than Boeing.

However, if you use only the General Electric industrial business, which is a more apples-to-apples comparison, its free cash flow shrinks to $7.8 billion (industrial cash from operating activities of $11.6 billion less $3.8 billion in additions to property, plant and equipment) and a free cash flow yield of 3%.

Bottom Line for GE Stock

GE had a 36% increase in its fourth-quarter earnings, but if you exclude income taxes, it was half that amount. Furthermore, cash flow from its industrial businesses actually declined by 5% year over year, a sign that not everything is as wonderful as GE would like investors to believe.

From where I sit, General Electric is a good company — I said as much in December. However, the latest numbers suggest it’s still in transition, which makes Boeing’s 3.5% yield more attractive to me than GE stock’s at 3.2%.

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

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