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Using a Value Line Report: General Electric, a 2012 Dogs of the Dow – April 20, 2012
General Electric’s (GE – Free Value Line Research Report on General Electric) fall from grace is clearly evident in the Graph. Its shares fell from the $40 per share level in late 2007 to a low of about $6 in early 2009. (A stock’s high and low for the year are listed above the Graph.) Earnings declining from $2.20 per share in 2007 to just $1.03 in 2009, as noted in the historical portion of the Statistical Array, is another clear indicator of just how hard the company’s once pristine image was tarnished.
Perhaps the most notable event, however, was the company’s decision to cut its dividend from $0.31 a share per quarter to just $0.10. This was the change that truly destroyed trust for long-term shareholders. That cut took place in the third quarter of 2009, as shown in the Quarterly Dividend box at the bottom left of the report.
These types of events stick in investors’ minds when looking at a company, and for good reason. So while management has been working hard ever since this difficult period to gain back what it has lost, it hasn’t yet convinced investors that it has changed enough. That lingering fear in investor minds is where opportunity lurks for those brave enough to invest in General Electric stock.
Emotion, however, is a powerful force in the investing world. That’s where an investment system can help. The Dogs of the Dow is just such a system—and one that “picked” General Electric this year. Indeed, the whole logic of the Dogs approach (buying the five highest yielding stocks in the Dow Jones Industrial Average each year) is that it leads to buying out of favor industry leaders. And, investors get paid to wait via the high dividend.
So, what is there to like about General Electric, if one can look past the past?
Valuation is one plus. At the recent P/E of 13.0 (found in the Top Label that runs across the top of each Value Line report), the shares are trading at a valuation level last seen in 2009—the depths of the company’s difficulties. The relative P/E of 0.87 is also in line with that period. So, historically speaking, the shares are as inexpensive as they have ever been. They are also trading at a low valuation on an absolute basis compared to the market today.
The dividend is again on the rise, as the Quarterly Dividend box shows. The company boosted the quarterly disbursement three times in less than a year between 2010 and 2011. The current run rate is $0.68 a share per year. That’s still a far cry from the $1.24 that was paid in calendar 2008, but Value Line analyst Erik Manning expects it to jump to $1.20 per year over the next three to five years.
Business has been improving and the company has put forth a vision for the future, which includes focusing on several core initiatives, such as green technology. Overall, management has been able to live up to the targets it has set for itself—a material shortcoming leading up to and through the recession. So, while this certainly isn’t the company former CEO Jack Welch ran, it is beginning to remake itself as the company Jeffery Immelt runs without the hindrance of the previous CEO’s relatively large shadow.
There are, however, some things not to like, too. For one, the company is not the same financially as it was. This is evident in the Financial Strength Rating of B++ for a company that was once awarded the top score of A++. (Financial Strength is a proprietary Value Line measure that can be found in the Ratings box.) This, coupled with a middling score for Price Stability, leads to just an average Safety Rank—another proprietary Value Line measure, this one found in the Ranks box.
Basically, these measures indicate that General Electric stock comes with risks. These risks aren’t expected to be greater than a generic “average” company, but they are greater than some other options in the Dow for similarly diversified companies. 3M (MMM – Free Value Line Report for 3M) and United Technologies (UTX – Free Value Line Report for United Technologies), for example, are both top rated for Safety and Financial Strength.
The company’s beta, a measure of volatility relative to the broader market, is also elevated at 1.20 (found in the Ranks box). Investors here shouldn’t expect a gentle ride, if the market goes up 10%, GE stock is likely to advance 12%—however, if the market were to fall by 10%, GE stock would be expected to fall 12%. This fact isn’t necessarily good or bad, but one about which investors, even those following a system, should be aware.
The Dogs of the Dow strategy is meant to be simple to follow while at the same time highlighting interesting investment opportunities. Often the companies that the system brings up come with “baggage.” General Electric certainly falls into that category. If you follow the Dogs, however, there’s a lot to like here so long as you also understand the risks and can look to the future without getting mired in the past.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.