Warren Buffett (Trades, Portfolio) has long been considered the consummate value investor. His penchant for value investing is generally attributed to his relationship with the renowned father of value investing Ben Graham.
What is often overlooked is the influence that partner Charlie Munger (Trades, Portfolio) brought to Buffett's investing philosophy. Buffett attributes Munger with introducing him to the concept of investing for growth at a reasonable price. Consequently, Buffett has evolved from the traditional Ben Graham “cigar butt” value investing strategy into a GARP (growth at a reasonable price) approach.
Let there be no mistake about it; Buffett and Munger continue to embrace valuation as an important component of their investing philosophies. In contrast to attempting to buy assets at a deep discount, they are more interested in buying growth at a sound valuation. Perhaps this deviation from the Ben Graham traditional value investing concepts might partially explain the recent selling of General Electric (GE, Financial) and the subsequent purchase of Synchrony Financial (SYF, Financial). Of course, I have no way of knowing what Buffett or his associates were thinking when they made these transactions. On the other hand, a close fundamental examination of both of these companies seems to support and validate these transactions as consistent with what I have thus far presented.
General Electric versus Synchrony Financial
In reading various articles (and the accompanying comment threads) on General Electric, I have encountered what I consider numerous misconceptions and unsubstantiated opinions about the company and its historical performance. To be clear, many accurately criticize General Electric’s poor historical stock price performance. They usually fail to recognize what has actually caused General Electric’s poor long-term price performance. Additionally, many people criticize recent past management (Jeffrey Immelt) and sing the praises of his predecessor Jack Welch.
Those are neither totally fair nor accurate assessments of each man’s legacy. In 2011 I wrote a two-part article discussing General Electric under each CEO’s tenure. In part 1 found here, I talked about the Welch era and General Electric.
In part 2 found here I discussed the challenges and headwinds that faced Immelt as Welch’s successor. To summarize, the deck was heavily stacked against even the possibility of success for Immelt. We shouldn’t feel too sorry for him because his personal rewards as CEO of General Electric were extraordinary even though shareholders did not fare as well. Nevertheless, all the blame cannot be placed on Immelt.
But most important, I am not defending Immelt or criticizing Welch. General Electric’s story presents important investing lessons on the relevance and significance of valuation as an essential investment consideration.
Summary and conclusions
What you may think or feel regarding General Electric’s future might determine whether you feel it has become an attractive dividend growth stock at current levels. I will let the readers decide for themselves. My objective with this article was simply to present a factual evaluation of where the company has been based on fundamentals and where it might be going in the future.
Additionally, Synchrony Financial (previously a division spun out of GE Capital) might also appeal to dividend growth investors who desire a fairly valued total return opportunity. But most important, I hope this article offered additional insights into investing based on the important principle of valuation.
Disclosure: No position at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment adviser as to the suitability of such investments for his specific situation.
