It is time for another stock analysis Pollie style. It has been awhile since my last analysis. I have been busy with work en family matters. Now it is time again to dive in to a particular stock.
Lets take a look at a company that provides all kind of stuff. From airplane engines to industrial products. Because it is a diversified company, it is normally less affected in a Bear market. And that is something Pollie likes 😉
This analysis is on The General Electric Company(GE).
Company (from google finance): General Electric Co is a diversified company with products & services that range from aircraft engines, power generation, oil & gas production equipment, & household appliances to medical imaging, business & consumer financing and industrial products.
GE is bringing focus in the company and their intend is to focus on its industrial activities, while slowly reducing the financial activities of the business. This part of the company shook the core during the financial crisis.The company took some steps in this transformation with the IPO of Synchrony Financial (NYSE:SYF) and the sales of the appliance business this year.
Can I explain this to a 10-year old? What Does This Company Do?
GE is a company that makes all kind of stuff. Such as airplane engines for the plane form our last holiday, household appliances for mommy and they are market leader in electronics. One of the founders of the company was the very famous inventor Thomas Edison! (you know the guy who invented the light bulb).
Dividend Aristocrat: GE is not a Dividend Aristocrat. This because GE had to cut the dividend back in 2009 by 68%. Before 2009 GE was a Dividend Aristocrat, and raised the dividend for 32 consecutive years. GE took action and the problems have been addressed. Since 2009 GE has raised its dividend six times. GE is a 3 star stock on Morningstar.com. But GE is no Dividend Aristocrat anymore. Therefore it is a fail.
Dividend Yield > 2.5%: The dividend Yield of GE is 3,3%. This is above the industry average. The Yield is above the requirements of the Pollie-Code, and therefore it passed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 68%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. And that makes me happy! So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3 and 5 years are 15.8, 19.8, 9.8. This shows a healthy (expected) increase over the last 5 years. With a 3 years average over 19% that makes me excited. I didn’t give the 10 years DGR because of the dividend cut in 2009. GE has addressed the problems and is looking forward. PE also passed the fourth Pollie-code.
P/E-ratio < 15: The industry average is 19.8. PE has a current P/E ratio is 17.8. So the P/E for GE is lower than the industry average, but it is still higher then their 5 years average (15.9). If we look at the current ratio we can say that is above the requirement of the Pollie-Code. Therefore this is a fail on the Pollie-code.
EPS > 0: The EPS is 1.41. So GE also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 10.16%. Another pass.
Market Cap. > 100M: No problem at this point. More than $ 267.52 Bil. Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 23.1. This is therefore a pass on the Pollie-code.
Stock price 52wk high-25%: The 52 wk high and low are: 28.09 and 23.69. This means that GE will be in my buying zone when the stock price is below 26.99 ((28.09-23.69)*0,75 + 23.69). At this moment GE is trading for $26.64. Therefore it is a pass on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for GE is 1.38. So I have to take in account that this stock can be volatile.
Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.
Stock Value (P) = D / (k-G) or Stock Value (P) = (D*(1+G))/ (k-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
When applied to GE with D = $0.82, G = 7% and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (very solid company), the intrinsic value will be around $27. At this moment GE is trading just below its intrinsic value. At this moment the shares are trading with possibly a small margin of safety.
Conclusion: When I look at the analysis, GE passed 8 out of 10 from the Pollie-code. The Pollie-code failed at the Dividend Aristocrat and the P/E ratio. If we take a look at Gordon Growth Model we can see that the stock is trading in the undervalued zone. So GE is buyable.
If we take a look at some of my fellow bloggers, GE is not in all portfolios. I think it is because GE is no Dividend Aristocrat anymore. Because they addressed the problems, I think it is a great stock and DividendMantra said it very good and I couldn’t say it better: GE bills itself as a company that allows the world to work better. And I like my chances in betting on the world being a bigger, better, and brighter place decades from now.
GE is a great stock on the right track! Considering all the data GE is a stock that is buyable. I certainly put GE on my watch list for my Vrijheid Fonds
What are you – the readers, thoughts on The General Electric Company? Is it a buy?
Please comment on my analysis and thanks for stopping by!
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