GE: Why the pressure is on

Posted May 2nd 2007 12:08PM by Georges Yared
Filed under: General Electric (GE)

I wrote two posts in the past few days about the pressure on General Electric's (NYSE: GE) senior management to deliver growth for both revenues and, of course, earnings. The response from readers has been mixed: some saying leave GE alone, it's a great company and look what has been accomplished over the past 20 years. Then there were some readers who are getting a bit impatient and would like to see the value rise -- through its own growth or through a split up.

The stock market has a way of evening out the playing field on the vast majority of companies. The stock market will get the valuation right. Sometimes we can catch a bargain or a slight inefficiency in the price, but eventually the markets get it right. So what's the deal with General Electric?

The stock market gives General Electric a $383 billion market capitalization. (Market cap is the total shares of a company times the market price). All that has been accomplished by this giant conglomerate is ALREADY in the price, or the market cap. No argument here that GE has been one of the greatest American success stories, ever. But that was then. Whether you are a current shareholder or contemplating buying GE, the big question is, where does it go from here?

It is that simple. If you or your advisor feel that GE is an outright buy at this price, right now, ask the question again, where do we go from here? Is there growth in the total conglomerate? Are there pockets of better growth within GE being dragged down by slower growth units of GE? Is there a good chance of the dividend being raised to higher levels? Is the current price earnings multiple of 16 justified by CURRENT business at GE? Not past accomplishments, but current prospects? Remember, all this company HAS already achieved is in the market cap.

As for the dividend, I could argue that splitting GE up into five or six separate operating units provides a much better chance of dividend increases. Why? Because if the shareholder of existing GE shares suddenly became the new shareholder of five or six different, publicly traded stocks (GE divisions trading on their own), the shareholder could keep the shares of the better performing units, with chances of dividend increases and sell off the shares of the under-performing units. Over a year or two, dividends would accrue at a higher level to the shareholder. The total dividend would end up higher than the current dividend and the rate of accelerating that dividend increases.

GE shares have been actively traded since last week, as Wall Street is seriously looking at the prospect of splitting this behemoth up. The debate will go on for at least the next five or six months. In the meantime, management is frantically trying to grow the revenue and earnings base and visibility. This will be fascinating to watch.

Georges Yared is the CIO of Yared Investment Research where he explores more growth stock ideas.

Tags: GE

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Reader Comments (Page 1 of 1)

5-02-2007 @ 12:57PM

Holben in Denver said...

perhaps another facet of this earnings-price issue is the constant dilution of outstanding stock by GE. I think GE currently has just over 10 BILLION outstanding shares out of 13 BILLION authorized. My opinion is that the stock options and dividends given to executives needs to be stopped (not just at GE), and the same for futher dilution.

5-02-2007 @ 4:17PM

Elisa said...

GE is similar to buying a mutual fund...and it hasn't done well in recent years. Maybe if executive pay was tied to performance of the shares things might be different. Executive compensation compared with what investors get is WAY, WAY out of controlin this country. Shame on boards of directors for permitting it.

5-02-2007 @ 4:26PM

JLP said...

Your comment "The Stock Market will get the valuation right." Not right according to Benjamin Graham in "The Intelligent Investor". Graham (the man who taught Buffett) makes the point thoughout the book that the Market is either high or low, and this is where you as an investor can take advantage and make money.

5-02-2007 @ 8:52PM

Richard Cunningham said...

Executive compensation is way out of hand and exhorbinant. Blame the Board of Directors- the executives will take every dime offered them whether they deserve it or not. the Boards are usually made up of people doing the exact same thing at their own companies.

5-03-2007 @ 9:26AM

A. Kosmetatos said...

George,
I have come to enjoy your insights into GE I'm an active employee since 73 and an investor since 75.I do not have a lot of confidence in the current CEO, when the Reinsurance was sold we shareholders received nothing! I'm now looking for an exit point for my holdings as I don't see anything changing. If it hadn't been for the Citi analyst we would be around 33 and falling, and we will if the BOD doesn't act soon.

A. Kosmetatos