It's not easy following in Jack Welch's footsteps, who
practically wrote the book on how to grow a business. Ever since
taking the reins in early 2001, Jeff Immelt has consistently paled
by comparison, having little to show for his first decade at the
General Electric (
. On a compounded basis, sales have grown less than +3% annually
during his tenure.
But all that is about to change.
GE is almost done repairing the damage that was wrought by the
global economic carnage of 2008, and the company is again gearing
up to play offense. You won't notice it in the near-term, as GE's
revenue is expected to shrink a bit more in 2010 and 2011. But the
stage is now being set for a robust return to growth in 2012 and
Immelt is counting on three factors to propel growth. First, he's
decided to step up R&D funding from 3% to 5%. That means GE
will be spending more than $30 billion every year to ensure that
each of GE's operating divisions have industry-best products.
Second, he's breaking out GE's checkbook. Already in October, GE
has announced plans to acquire energy services firm Dresser for $3
billion and another $1.5 billion to buy up a consumer finance unit
. The latter move is a notable
for GE. The company was backpedaling from too much exposure to
finance in 2008 and 2009. Now that GE's financial arm is once again
strong, the company can snap up rivals that are still on weak
GE's acquisition track record is not especially impressive. The
company completed 196 deals in the last five years, according to
Bloomberg, but not all of those deals panned out -- especially the
larger ones. GE is now committed to stick with simpler deals -- in
the $1 billion to $3 billion range -- in a bid to simply augment
current divisions. In the past, bigger deals were aimed at
instantly changing the landscape of an entire industry.
The third leg of growth: the
. GE is considered to be a late-cycle play, which means that its
industrial businesses such as gas turbines, jet engines and
locomotives tend to see much greater investments once economic
growth is clearly underway. That's not likely to materialize for at
least another 12-18 months, which is why GE isn't getting a lot of
buzz in financial media circles right now.
All about theyield
For many investors, GE's health can only be measured in the size of
payout. GE was forced to cut its dividend in half in 2009, the
first such cut in more than 30 years. The annual payout, which
peaked at $1.24 a share in 2008, recently fell to as low as $0.40.
In late July, GE boosted the dividend back up to $0.48 while also
toward an ongoing $11 billion stock buyback.
That generosity comes as GE is again on a course of prodigious cash
flow. GE generated more than $20 billion in
free cash flow
in 2008, but saw that drop to $7 billion last year -- though it
should be back up above the $10 billion mark by next year. More
importantly, the steps above should help free cash flow rise back
to at least $15 billion by 2012 or 2013, and that should enable GE
to boost the dividend back up to around $1, which would translate
of more than 6% (and closer to 7% if GE completes the planned $11
billion stock buyback before then).
From less bad to good
In the near-term, GE is all about getting healthy. Revenue at the
company's all-important finance arm is likely to be flat, but
portfolio losses (and the reserves against them) are shrinking
quickly. That fully accounts for expectations that GE's per share
profits will rise more than +15% in 2011 to around $1.30. As a
point of reference, GE earned an average of $1.90 a share in 2005
through 2007, and there's no reason that profits can't return to
those levels once the late-cycle businesses kick in. Shares trade
for less than 10 times those normalized
, and as noted, also offer the chance of a very juicy dividend
yield for those willing to buy now and wait a few years.
Action to Take -->
This is not the sexiest name in the stock playbook. Many other
companies have even higher growth prospects or lower valuations.
But GE once was -- and will once again be -- a core blue chip
holding for many mutual funds and pension funds. As they add GE
back into their portfolios, shares should see a steady rise in
demand -- which is why now is a good time for individual investors
to pick up the stock. The worst has passed for this stumbling
giant, and Jeff Immelt may finally soon get the vindication that
has long eluded him.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.