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Blue Chip GE Gives Investors the Blues

Tuesday, November 14, 2017

During my many years of providing investment advice I hear people say from time to time they just buy the blue-chip stocks and sit on them no matter what. Well, this past week one of those blue-chip stocks, General Electric fell apart at the seams.

Over the last 20 years, I have bought and sold General Electric as it is gone from a value stock to an over stock. Back in late 2015, I was recommending a sell on the stock at around $28 per share. The valuation ratios, growth rates and even the dividend payout ratio did not justify the stock price. As of today, the stock price has fallen below $17 per share as the company reveals the unproductive deals made over the years.

The new CEO, John Flannery has made the tough call to tear the company apart and properly rebuild it. In the process, he has cut the earnings going forward and a substantial, 50% cut in the current dividend. Over the years I have taught investors on my radio show, TV and writings that when you own a dividend paying company you must watch the dividend payout ratio and the cash flow of the company. This will tell you if the company can sustain the current dividend. And I’ve warned, if the dividend is cut, you’re not only losing the income from that dividend, but the stock price will decline as well. That is what is happening here with this blue-chip company which is the oldest company in the Dow Jones Industrial Average. The length of time the company has been around, or the name of the company has very little to do with the value of the company. Investors must always look at the fundamentals of the business, large or small, new or old.

With that said, let’s take a closer look at the current numbers for General Electric to see if after the recent decline it is worth the investing in.

Everyone understands that stocks are not cheap currently, the current PE ratio for General Electric is 23.9 which is above the entry average of 22.2, not a good start. Price to sales however, does favor General Electric at 1.4 versus 1.8 for the industry. Due to all the acquisitions over the years there is no price to tangible book value because of the high prices paid for many companies over the years. Price to cash flow is 12.5 for the company, which compares favorably to the industry average of 16.4. Prior to the recent dividend cut announcement, the yield was 4.7% and the payout ratio was 109%. I always asked the question, how are they going to sustain the dividend rate when they’re paying out more than they are bringing in.

Over the last 12 months, sales have declined by half of 1% compared with the industry growing their sales at 2.2%. Earnings-per-share year over year for the last 12 months also declined by 3.1% when the industry was experiencing growth of 30.2%.

Always important is a strong balance sheet and unfortunately, GE does not have one. Their debt payments finally have caught up to them and their debt to equity is 179 versus the industry at 106. The new CEO has made the wise decision to work on paying down the debt.

Return on equity which should be an important metric for investors shows GE at 9.6 well below the industry at 30.1. The net profit margin for GE at 6.3 doesn’t look too bad, however it is below the industry average at 8.0.

Receivable turnover for the company is not too bad at 4.9 which is below the industry at 5.9 over the last 12 months. Inventory turnover is a slight bright spot for the company at 3.7 just slightly above the industry average 3.5.

Looking forward to the year ending December 2018, the mean of 10 analysts are looking for earnings per share of just $1.04. The range is also wide with one analyst looking for earnings of $1.62 and another analyst looking for earnings of just $.62. I also must warn investors that we could see these earnings estimates fall even further. But based on the current estimates and a recent price of $17.90, the stock is trading at 17.2 forward earnings, not a bargain at all. Using our forward multiple of 16.5, the target sell price is $17.16. Based on these numbers I would not be looking to buy the stock until it fell to around $13/share. And I would not expect a turnaround in this business for at least two if not three years. There are much better companies to invest your money in that pay a better dividend and have much stronger fundamentals.

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