New Stock Position

27 Jul 2014 01:10
Tags ge general_electric

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With the recent pullback in GE's stock price I initiated a small position on Friday 7/25 at a share price of 25.76 which will provide $50 annually to my dividend portfolio.

While I needed an industrial to diversify my portfolio I was not entirely sold on GE's future. Many DG investors over the last two years have been buying shares on the faith of GE's return to its historically legendary performance. But I wasn't convinced that GE was completely out of the woods in regards to risk. I could have initiated a larger position but until certain numbers improve I'll keep a small position.

Starting with the bad numbers. Their debt to equity ratio came in at a whopping 2.38 while most of their competitors have a debt/equity ratio of 1 or less. But in fairness GE has been slowly reducing their debt load over the last 3 years. Another concern is their payout ratio sitting at roughly 60% and again in comparison to their peers who have a ratio below 50% seems to be a bit steep and when vital money may be needed for investment.

Now the good. Revenues are forecasted to grow at an annual rate of 7% over the next 5 years and when combined with a stock repurchase program it makes a dividend growth rate of 7-8% annually very achievable. Reducing exposure to the financial sector is another positive. GE has been slowly divesting GE Capital's assets to reduce over exposure to one industry (it was their down fall in the crash of 2008-09). Looking to exit the appliance business, GE invested heavily to make its appliance segment more efficient and competitive globally which is making the divestiture a more attractive deal than it was just 5-6 years ago. While some might see this as a negative it really isn't, the appliance business while doing well with sales carries very slim margins. As an investor I'd rather see money invested with products or services that have higher profit margins.

Finally the risk. Going forward GE will be acquiring Alstom's power generating business at a cost of $10 billion. There are many what-if scenarios so the future is still unclear. I plan on giving it 2 years to see how this business has been integrated and contributes to profit margins.

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