If you spend any time watching the ups and downs of Wall Street, then the names General Electric (NYSE: GE) and Verizon (NYSE: VZ) will be familiar to you. While they operate in very different industries, they are both iconic companies with incredible histories. That said, one is in a decidedly better position today than the other. Here's what you need to know to pick between GE and Verizon.
1. What they do
General Electric operates in the industrial space, with a diverse set of businesses including energy, aviation, and healthcare. But it doesn't provide consumers with products( at least not anymore); it sells products to other companies. For example, it makes the giant turbines that produce power from the wind. Your local electric company probably buys from GE, with you benefiting from the power much further down the line. Industrials, however, tend to be cyclical in nature, since capital spending usually rises and falls with the economy.
Image source: Getty Images.
Verizon is a telecommunications company, with one of the largest market positions in the U.S. cellular phone space. Although it provides products and services to businesses, it predominantly sells directly to customers. But not just one or two large customers -- millions of small customers. So the loss of any one customer isn't a big deal. Moreover, what it sells is basically a necessity. When times are flush, its business will probably look boring, but in a recession its business will generally hold of relatively well.
2. Changing times
That said, both GE and Verizon are dealing with big shifts today. Verizon, for example, has been trying to maintain its strength in telecom while building up a position in the content that gets delivered to its customers through its systems. Content is a big story today, with tech upstarts like Netflix and Amazon competing with entrenched industry giants like Disney for dominance. Wading into this fight hasn't been going very well for Verizon, which was forced to write down the value of its investments in industry also-rans Yahoo! and AOL.
The strength of its core telecom business, however, has allowed Verizon to make this mistake without too much financial pain, and the company remains solidly profitable. It has also continued to raise the dividend annually with little trouble, with a 14-year streak of annual increases behind it.
GE, meanwhile, is still dealing with the fallout from its decision to allow its finance division to vastly outgrow its core purpose (helping customers buy its products). The division eventually got into everything from insurance to home mortgages, areas that have been problematic for it since the deep 2007-2009 recession.
Although the industrial company has been working to deal with the issue, its effort hasn't been going well. And the pain has lingered for a decade, ultimately leading to multiple restructuring efforts, asset sales, a lot of red ink, and the reduction of the dividend to a token $0.04 per share per year. Meanwhile, some of its key divisions, notably energy and oil and natural gas, have been facing headwinds of their own.
So GE is fighting on two fronts today as it tries to recover from past mistakes and deal with the ups and downs within its cyclical industrial operations. That's not a great combo for investors and helps explain why the stock has fallen 75% over the past three years. (For reference, Verizon's stock, despite the company's own self-inflicted wounds, is up 6% over the same span.)
3. A bit of debt going on
That said, both Verizon and GE have debt-heavy balance sheets today. However, there's a big difference between these two companies. Verizon's operations are supported by massive infrastructure investments. While costly, they provide protection from competition. It would be hard, if not impossible, to create from scratch what Verizon has. That provides the company with a valuable moat to protect itself and support its long-term success. Verizon also has lots of small customers that consider its products and services a necessity in good times and bad, so affording that leverage shouldn't be a huge deal.
GE, on the other hand, has a heavy debt load and an often volatile business that is struggling today. The debt is left over from its past mistakes, and there's no easy way to deal with it. Right now, the focus is on selling assets at what some consider fire-sale prices. GE has even begun to sell parts of the businesses that are expected to be its long-term growth engine. While these moves may be buying the company financial breathing room, they could also end up weakening its long-term outlook. In other words, debt is a much-bigger problem for GE today than it is for Verizon.
An easy win
Although this is something of a top-level view, it's pretty clear that Verizon is in a much better position today than General Electric. At this point, GE is really a high-risk turnaround stock that only the most aggressive investors should be looking at -- and even then, the risks may outweigh the potential rewards.
Verizon, on the other hand, has a dominant and well-protected industry position, and a still-strong core business. Even though its efforts to reach into new areas haven't gone quite as well as planned, it remains a strong company. It's worth a look even for conservative investors, noting its hefty 4.2% yield should be particularly attractive to those with an income focus. That said, there are other companies with financially strong businesses, moat-worthy operations, solid growth prospects, and management teams that have avoided costly capital allocation mistakes. So before hitting the buy button on Verizon, despite its being a far better choice than GE, you should probably consider more options.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool recommends Enterprise Products Partners and Verizon Communications. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com