General Electric: Once and future dividend grower?
A couple of years ago analysts were falling all over themselves recommending General Electric (GE: 16.51 0.00%, yld: 2.42%) - the quintessential ultra-conservative blue-chip dividend payer. I recall one money manager on Consuelo Mack WealthTrack recommending it as the “one investment” that everyone should have in their portfolio, with words to the effect that it was a great buy at the then price of $37 per share.
I wasn’t tempted to buy it then - it seemed pricey in the 30s, and the ~3% dividend yield wasn’t enough to lure me in at that price. But what about now?
A Dividend Aristocrat about to fall from grace?
GE is a Dividend Aristocrat and, according to DividendInvestor.com, has increased its dividend for 33 consecutive years with a five-year average annual dividend growth rate of over 10%. Pretty impressive, although its recent payout ratio at 70% was beginning to look a little on the high side.
Unfortunately, the current $11 share price and whopping 11% yield is saying that the market is expecting a dividend cut. And the market’s recent track record with other stocks in this regard is pretty impressive. Assuming the dividend is cut, and depending on by how much, GE’s long dividend-paying (and growing) history may nonetheless still argue in favor of it remaining worthy of consideration, especially if it can be bought on the cheap …
Fundamentals: Looking interesting here
In trying to get a rough handle on GE’s DCF calculated “fair value,” I thought I’d try to be very conservative and use analysts’ fiscal-year 2009 projected earnings - which have come down significantly in recent months - rather than the earnings for the last 12 months. According to MSN, FY 2009 earnings are estimated to be $1.27 - down almost 30% from what the company earned in 2008.
Plugging this and an estimated five-year earnings growth rate (also from MSN) of ~8% into the calculator gives a fair value of about $16 per share. This drops to about $14 using a five-year projected earnings growth rate of 5%. Both of these values are above the stock’s current share price (about $11/share) and suggest it may be undervalued here.
To get a slightly different take on GE’s valuation, a check with Ockham Research shows price/sales and price/cash earnings ratios well below recent historical values, to such an extent that the stock is rated “greatly undervalued.” Fundamentally then, GE appears interesting here, although certainly not without concerns - but those come with the territory when evaluating stocks that are (or appear) “greatly undervalued.”
Technical picture: More oversold than 1974
A 47-year price chart of GE (below) shows how the stock has been decimated over the last year - all the way down to its lower long-term trend channel (in this case two standard errors below the linear regression trendline). The price oscillators in the middle two graphs show the stock is now more oversold than it was in 1974 (which turned out to be an excellent long-term buying opportunity).
This doesn’t mean GE won’t go lower - it certainly wouldn’t come as a shock if it did. It does suggest, however, a potential long-term buying opportunity.
Bottom line
I’m currently short some LEAPS put options on GE, and could ultimately end up being put the stock at $12.5 (although my net cost basis would be much lower). I initiated this position as part of a way of extricating myself out of a long GE stock position at higher prices (mid 20s) that I was no longer comfortable with.
However, barring significant further deterioration in the underlying fundamentals, I’m comfortable with my position in this diversified industrial conglomerate here, even factoring in the probability of a dividend cut. If the company were to “reset” its dividend to a yield of, say, 3% at current levels it could hopefully once again be in a position to steadily grow it in the years ahead.
