By Jim Woods of InvestorPlace
NEW YORK (
TheStreet ) -- For decades,
was considered a dividend darling and a perfect fit for the so-called "widows and orphans" portfolio. In addition to providing big dividend payouts, the stock also provided investors with outstanding price appreciation during the 1980s and 1990s. But shortly after start of the 21st century, GE's fortunes took a turn for the worst. The stock tanked during the mid-2000s, and then the Great Recession hit, knocking the global conglomerate's shares for a massive loop.
Over the past five years, shares of the maker of jet engines and washing machines -- and the owner of GE Capital, one of the largest financial services companies in the country -- are down 51% (as of Sept. 27). That's certainly not good for widows or orphans, and it's especially atrocious for investors looking to get some modicum of growth out of their dividend-oriented stocks. Yet recently, GE shares have made a mad dash higher. The stock is up 13.5% over the past three months, and year to date, GE shares are up 8.6%. Will the recent trend for the stock continue, or will it return to the sluggish ways of the past? Here are the pros and cons of this conglomerate's stock.
Back in the black.
In July, GE posted its first quarterly profit since 2007, as an improvement in orders and lower losses in its GE Capital lending unit helped push the company back into the black. Earnings came in above expectations in the second quarter, as GE earned 30 cents per share, a 14% climb from the 26 cents it earned in the same quarter a year earlier. GE said it saw a strong increase in its industrial-operating margins due to favorable costs and restructuring. The only segment of GE's business that didn't show a profit was GE Capital. The earnings beat helped drive GE shares higher, and if the company can continue delivering it will likely continue doing wonders for the stock.
Dividend boost and payback plan.
A couple of weeks after reporting earnings, GE announced an increase in its quarterly dividend to 12 cents per share. That's a 20% increase over its prior dividend in June of 10 cents. The increase was the first since the company cut its dividend in early 2009. The company also said it would institute a share-buyback plan to help boost the stock's performance. GE's steps to make shareholders happy were very welcome on Wall Street, and the shares have responded with a nice kick to the upside since the dividend lift and buyback plan was announced.
Wide exposure to global growth hot spots.
GE is a global growth play, as the conglomerate sells its products in virtually all around the world. Recent deals in Brazil, China, India and other emerging markets shows that the company's global brand is still going strong. If the tide of the global economic recovery continues to rise, it will undoubtedly lift GE's boat.
Despite showing its first profitable quarter in years, GE's revenue in the second quarter actually declined 4%, and came in below consensus estimates. Total revenue was just $37.4 billion, well below the $39.1 billion in the same quarter a year earlier. More importantly, the company's industrial sales were down 6% to $24.4 billion due to lower-equipment sales, while financial revenue fell 2% to $13.1 billion as a result of the downsizing of GE Capital. Declining revenue isn't commensurate with the global growth story, and if GE can't grab a bigger share of worldwide industrial sales, it faces a tough slog going forward.
A far cry from dividend bliss.
Though GE raised its quarterly dividend to 12 cents a share in July, that's a far cry from the 31 cents a share the company was paying before last year's dividend cut. Despite paying an attractive 2.9% dividend yield, GE will have to do a lot more to appeal to dividend-oriented investors if it wants to capture more of their hard-earned dollars.
A poor use of capital.
Some argue that GE shouldn't be increasing its dividend or buying back shares right now. Well-known GE critic Charles Ortel of Newport Value Partners has gone on record saying the company would be better off keeping that money and building up its capital base. Ortel claims that if financial conditions in the global economy get worse, GE could find itself immersed in a funding crisis.
The Final Word on GE
When assessing the pros and cons of GE, it's tough to arrive at a clear-cut decision. The company is finally making money again, but it's doing so on declining revenue. The dividend has improved, but it's far from where it was a little over a year ago. Yes, the company has a great global brand, but some question management's recent decisions. Based on what can be called a push between the pros and the cons, the verdict here is slightly in favor of the cons. GE stock may indeed continue benefiting from the current bullish mood in the overall market, but it is going to take a lot more positive news to keep this conglomerate's stock running.
As of this writing, Jim Woods did not own a position in any of the stocks named here.