Once valued over $500 billion two decades ago, the now roughly $66 billion General Electric (GE, Financial) has shown consistent business problems. It is only for the least sensitive investors to consider as a value investment in current times.
Chief executive turnovers, quarterly dividend payouts cut down to a penny, GE Capital business concerns, reports of underfunded pension of some 620,000 retirees, and the ongoing SEC and Justice Department investigations have all contributed in wiping out nearly 56% of GE’s share price just in 2018.
Recently, a senior analyst from Gordon Haskett, who has been a GE bear, came out with a warning that GE is now selling everything but the kitchen sink:
It is not that GE had completely failed to serve its shareholders prior to its recent dividend cut. In fact, the industrial company was able to provide a total of $26.8 billion in dividends in the past three fiscal years while at the same time period was able to reduce its overall debt by nearly $64 billion. That’s a tough feat, as GE generated a cumulative loss of $4 billion in the same period.
However, investors should also have taken notice that GE has been actively diversifying parts of its wide-array businesses in recent years. In 2015, GE’s discontinued operations raised $79.6 billion in proceeds and another $59.9 billion was raised the following year.
Meanwhile, GE also had ill-timedly repurchased some $40 billion of its shares between 2015 and 2017 when it bought back its stock at prices between $20 and $32 compared to its current share price of $7.32.
There is no telling when the investigations and the multi-billion pension issue will be resolved, and that it has delivered a 33% revenue drop in the company’s major business, power, in the recent quarter does not help the overall image.
Analysts, on the other hand, are expecting a turnaround in 2019 for GE with earnings-per-share estimates climbing to 84 cents from 7-cent estimates this fiscal year. In addition, the analysts' price target of $11.77 per share is also well above today’s share price.
Value investing gurus largely have stuck by the stock and even have bought some more GE in recent quarters. Trian Fund Management by Nelson Peltz, Long Leaf Partners by Mason Hawkins (Trades, Portfolio), Fairfax by Prem Watsa (Trades, Portfolio) and Oakmark Select by Bill Nygren (Trades, Portfolio) have all increased or at least maintained their GE investment after having initiated their long position somewhere in the $13 to $26 range at some point in recent years.
Therefore, bailing out of GE at this point and realizing hefty losses may be hard to bear and counterintuitive, but there are still other companies that present fewer risks that may provide better positive return opportunities over the long term.
Nonetheless, deep respect should be provided to those Investors who ignore the flashing warnings signs and think that GE has the wherewithal to outlast its business difficulties over the coming years.
Disclosure: No shares in GE.
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