General Electric Company (NYSE:GE) has not had a smooth ride. After falling 2.25% on Wednesday, GE stock closed at a new 52-week low. That pain continued Thursday and Friday, as shares are now down 13% on the year.
You may recall that earlier this month, we said “General Electric isn’t for everybody. But for the right shareholder, it can be a great addition to their portfolio.” We argued that this range-bound stock gave some investors an attractive trading range of $29-$31. However, we also said that GE would either breakout or breakdown from that range. We just didn’t think it would be two weeks later.
Now, we’re looking at a stock that yields 3.5% and trades at 14.5x forward earnings. Analysts expect 9.4% earnings growth this year, 16% next year and 12.3% annual growth for the next five years. Revenue may only grow 1.7% this year, but analysts expect 6.2% growth in 2018.
Phew. Sorry for the numbers blitz there. But, honestly, these aren’t bad numbers should GE deliver.
The Big Worry for General Electric
It’s not the valuation that’s a concern for investors. It’s the dividend. Analysts are piling on the cash-flow train, arguing that beyond 2018 GE may have to cut the dividend.
Cash from operations — the inflow and outflow of cash from GE’s main business activities — has been moving in the wrong direction. In fact, it’s declined for four straight years. Despite steady CapEx, we’ve also seen free cash flow fall as well.
Indeed, this is a concerning trend. The old saying “cash is king” doesn’t seem to apply to GE management’s philosophy. If the dividend is cut or reduced, it will send shockwaves through its investor base. This is not what GE wants to do.
GE is a primary holding for a number of investors and funds based solely on the yield and low valuation. It’s not a growth stock where the dividend is of secondary concern or even lower, and this has been a primary catalyst for holding GE stock.
What’s more likely is that General Electric will slow down its hefty buyback. In 2016, the company returned $30.5 billion in cash to shareholders. A whopping $22 billion went to fund its buyback program.
So, to say that GE doesn’t have the flexibility to increase (or at least maintain) its dividend seems shortsighted when considering it could ease up on its buyback. Hopefully, it doesn’t come to that, though.
Trading GE Stock
Because analysts have been piling on the list of worries, GE stock has developed a bit of a negative stigma. Investors don’t want to take a chance on a stock that may cut its dividend, especially when there are so many other stocks not facing the same risk. In fact, here are 11 of the best, including AT&T Inc. (NYSE:T), Chevron Corporation (NYSE:CVX) and Altria Group Inc (NYSE:MO).
After looking at the charts, GE stock appears to be in No Man’s land.
The MACD, which measures momentum, could be near a bottom, as the purple line would suggest. Additionally, the relative strength index (orange circle) at the top would also suggest the stock is oversold.
That seemingly sets up GE stock to bounce. And, maybe it will. But, $27 seems to be the next best line of support, which is still 1%-2% away. This line is sort of flimsy, at best, which is why I’m not salivating over it.
A better level to buy General Electric stock would be $26, although admittedly we may not see GE stock that low. At that price, shares would yield just over 3.6% and GE stock would have much stronger support. Plus, the RSI and MACD levels would be even more extended, increasing the odds of a more powerful “snap-back.”
Again, I concede that a pullback to this level may not happen. But, I’d rather wait for a fat lob down the middle than swing at a whizzing hard-to-hit curveball.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
