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GE: “Supertanker” for Rough Seas
10/22/2014 8:00 am EST
This month we're adding a “supertanker investment” to help ballast your investment portfolio in the market’s current rough waters, asserts Ian Wyatt, editor of High Yield Wealth.
Multi-industry behemoth General Electric (GE) is certainly big, with a $255 billion market cap, so it's in no danger of being washed away. But more importantly, we like the direction this supertanker is going.
When many people think of GE, they think of light bulbs and toasters. But the company has long transcended light bulbs and appliances.
Today, GE does a lot of different things in many parts of the world. GE offers investors a strong portfolio of companies in areas such as oil & gas, aviation, healthcare, power and water, transportation, and financing.
That said, GE is ripe for change, and management knows it. Since 2010, the dividend has been increased to $0.85 per share from $0.46, but EPS is up to only $1.28 from $1.06. To be honest, EPS has been flat for the past three years.
Management is moving to get rid of inefficient and incongruous businesses. Last year, GE completed the sale of its media segment for $18 billion and has allocated the proceeds to buying back shares and increasing the dividend.
At the same time, GE is pulling back from financial services. Though historically profitable, GE Capital was a millstone around the company's neck during the 2008 financial crisis.
We see General Electric as well positioned to improve the efficiency and operating margins in its industrial segments.
We expect results to be aided by two primary longer-term trends: credit market improvement and improving global demand in longer-cycle infrastructure businesses, such as power generation, energy management and exploration, and jet engines.
We also think the company’s EPS growth and P/E multiple will benefit from its focus on simplifying the business. One of the more frequent criticisms of GE is that having its fingers in so many pies makes it difficult to value.
Shedding non-core businesses and narrowing the focus of GE Capital to commercial financing will only help.
As it stands today, GE has the very real potential of delivering a 27% annual return over the next 12 months, based on expected price appreciation and dividend yield.
As for the dividend, we expect another double-digit increase with the December quarterly payout (last year, the dividend was increased 15.8%).
With GE, income investors get a diversified portfolio of stable business that won't induce sleepless nights. At the same time, they have the opportunity to buy a value investment very likely to produce exceptional earnings and dividend growth for years to come.
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