GE Stock Remains Attractive for Income Investors
The solid dividend yield appeases shareholders as the company continues to reinvent itself
General Electric's (symbol GE) first-quarter revenue may have slipped year-over-year but the industrial giant still managed to exceed analysts' expectations thanks to strength in several key businesses.
GE's first-quarter results, issued April 21, were by no means overwhelmingly positive. But GE's goal of turning itself into a pure industrial company continued to make progress, albeit slowly. The case for GE as a long-term stock for income remains unchanged.
GE has spent the last two years undergoing a slow, painful transition away from what was a scattershot conglomerate of unrelated business. It was essentially a bank, an industrial company and a media company. The hodgepodge made it difficult for investors to value the business. That should no longer be a problem, analysts say. "From a classic conglomerate with diversified business interests in financial services, media, industrial and technology-based operations, the company has pruned its operating portfolio to focus on core manufacturing businesses with a digital edge," says Zacks Equity Research.
But it's not quite there yet in terms of taking off as an industrial firm. Blame the oil market. Oil-and-gas revenue fell 9% and segment profit fell 33%. GE is making a bold move to address the issues in energy demand by merging with oil-services giant Baker Hughes (BHI). The deal, which is slated to close later this year, will wring savings out of this line of business, and that will alleviate pressure on the bottom line. For now, however, the global oil glut remains an albatross.
Other GE segments posted strong results for the most recent quarter. GE's power, renewable energy, aviation, health-care and transportation businesses all beat analysts' expectations. Highlights included a 17% jump in revenue from turbines and power plants, which is GE's largest industrial segment. The broader renewable-energy business posted a 22% increase in quarterly revenue vs. the year-ago period.
As a whole, GE delivered net income of $619 million, or 7 cents a share, compared with a loss of $61 million, or a penny a share, in the same period a year ago. Excluding non-recurring items, adjusted earnings per share came to 21 cents. Analysts polled by Thomson Reuters were looking for adjusted earnings of 17 cents a share. Revenue fell 1% to $27.66 billion from $27.85 billion, but that managed to top Wall Street's estimate for $26.37 billion.
The latest results come a month after the company agreed to double its cost-cutting plan amid pressure from Trian Fund Management, an activist investor. Although that puts management's feet to the fire, it's good news for shareholders, as it should help the company attain its profit goal of $2 a share for 2018. Analysts are currently looking for 2018 earnings of $1.90 a share.
Buy GE Stock for the Dividend
The savings also will help the company achieve its pledge to return more cash to shareholders. GE expects to disburse approximately $8 billion in dividends this year and buy back between $11 billion to $13 billion worth of its own stock.
As anyone who's held GE stock for a while can attest, it doesn't wow you with price performance. But it's not as sleepy as some might think. Since the bull market began in March 2009, GE has actually matched the performance of Standard & Poor's 500-stock index including dividends. As an income stock, GE hasn't really been a disappointment. The idea is that as an industrial firm, GE will be poised for outperformance.
That said, this is an income play. GE has paid a dividend for more than a century and has delivered an annualized dividend growth rate of nearly 9% over the last five years. It's shown that it's committed to returning cash to shareholders. The current dividend yield on the stock is a healthy 3.2%.
The ultimate takeaway from the earnings report is that nothing has changed when it comes to GE being a solid dividend stock for the long haul.