Now seems like an ideal time to place on long-term bet on General Electric Company (NYSE:GE) and GE stock.
Shares of the industrial conglomerate have frustrated investors, falling 11.6% year to date, while falling 6.7% over the past year. This compares with an 8.6% year-to-date rise in the S&P 500 index, and its 15.8% increase in the past twelve months. But, with some patience, GE stock can still deliver 25% returns in the next 12-18 months, reaching $35 per share.
Creating Value for GE Shareholders
GE stock closed Monday at $27.98, up 0.36% and 15% below its 52-week high of $33 per share. The stock’s recent sell-off, caused by the company missing its own cash flow projections by a whopping $1 billion, has created an attractive entry point for investors who value a strong dividend yield of 3.44%, versus the S&P 500’s 2.00% yield.
But, there’s still plenty of value-creating catalysts to be excited about, not the least of which is the fact that Boston-based GE is near the closing of its mega-deal with Houston-based Baker Hughes Incorporated (NYSE:BHI).
The deal is aimed at combining Baker Hughes with GE Oil & Gas. The combined entity will be called Baker Hughes, a GE Company, of which GE will own 62.5%, which will then be spun off as a separate publicly traded company. There’s no question that this is a good move for GE, which has seen its oil and gas division hit hard from low energy prices. This merger will coincide with the recovery of oil prices and, possibly, an increase in capital spending from oil and gas companies.
What’s more, larger scale and a better technology portfolio will allow the newly-formed entity to better compete with Schlumberger Limited (NYSE:SLB) and Halliburton Company (NYSE:HAL), larger players with which Baker Hughes attempted to merge until regulators intervened. And, to the extent the new company can focus on efficiency and technology to cut costs, it can achieve greater profitability, too. Not to mention, the timing of the expected closure of the deal could be advantageous, particularly from the standpoint that the industry has fully adjusted to oil prices of $45-$60 per barrel.
All told, GE will resolve multiple problems with this deal. And, not only will the company immediately improve its oil and gas division division, GE also stand to realize a significant tax advantage, too. This is because the company will use its cash reserves to pay $7.4 billion for a special divided to current Baker Hughes shareholders, which shouldn’t be an issue for GE.
As it stands, instead of paying $98.9 billion in cash and cash equivalents for Baker Hughes, the $7.4 billion is being funded with debt. Better still, GE will secure the loan from GE Capital with a zero interest loan through 2019.
While CEO Jeff Immelt has lost some credibility with shareholders over the past couple of years, Immelt and his team are applying sound financial engineering to turn the company’s oil & gas business into a powerhouse. At the same time, GE will keep its massive cash stockpile to use on other aspect of the business.
Bottom Line for GE Stock
GE, which just returned $4.4 billion to shareholders in the first quarter through a combination of dividends and buybacks, deserves more time to get back on track. Not only did GE affirm its industrial operating and verticals EPS outlook for 2017, the company said it expects cash flows to improve throughout the year.
As such GE stock — which is priced at just 14 times fiscal 2018 estimates, versus 19 for the S&P 500 index — presents solid value for investors who are looking for strong dividend payer that can outperform the market in the next 12-18 months.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.