Investors appear to be in love with stocks right now, and willing to pay a few more pennies every day in exchange for every dollar of corporate earnings. Given that it has taken more than five years for major market indexes, including the S&P 500, to work their way back to near their 2007 highs, you may be pardoned for being nervous. But if you’re worried that the stock market rally may be a bubble in the making or that a selloff may wipe out all your gains, you may want to stop and ponder the fundamentals of one of the market’s iconic stocks: General Electric (GE).
Pondering GE is what helps keep many stock market optimists calm and enables them to sleep at night, just as eyeing the astonishingly low yields on junk bonds reassures them that they have made the correct call on asset allocation. And here is why.
Firstly, there is the question of valuation, or PE ratio. With the S&P 500 still trading at only about 14 times prospective earnings, GE’s valuation is squarely in line with that of the market – even though its dividend yield is more than double that of the S&P 500, at 3.21%. Moreover, analysts are calling for earnings to grow by 37% over the next three years: that’s a robust performance in the midst of a still lackluster global economy.
GE has already begun to show signs that it is able to do well even when emerging markets growth falters. In India, for instance, growth slipped to its lowest level in a decade and GDP grew only 6.2% in the fiscal year ended in the spring of 2012 and may not top 5% this year. But Jeffrey Immelt, the company’s CEO, predicts that GE’s revenues from India will continue to grow at a rate of 15% to 20% annually.
The company already displayed some of that strength in the key emerging markets when it reported its fourth-quarter results. Its revenue from industrial businesses in China grew 19%; in Russia and Latin America, 22%. Moreover, its operating margin climbed to 13.4% from 11.9% in the prior year, as it shifts its business mix. The early sale of the remaining half of NBC Universal to Comcast Corp. (CMCSA) is one example of that push back toward higher-margin businesses, such as medical devices and its core engines business. GE, Immelt has declared, is first and foremost an industrial company and should focus on those businesses.
The completion of the NBC Universal transaction – scheduled to take place by the end of this month – offers more upside potential for investors. Immelt has pledged to return a whopping $18 billion to the company’s investors through a combination of stock buybacks and dividends. It already has announced a $10 billion buyback program, and boosted its dividend in December by 12%. Analysts looking for companies they believe are likely to keep increasing their dividends frequently point to GE as one example.
The company’s cash position already is robust, having grown even more rapidly than its dividend payout.
The result? In the eyes of many institutional investors, it’s hard to shun a market that contains stocks with GE’s characteristics: a solid, proven group of businesses; a strong position in higher-growth emerging markets; evidence that management is re-jiggering its portfolio of businesses to emphasize those with the highest margins or greatest potential, and high and rising dividend yields. Especially when those investors aren’t being asked to pay much, if anything, in the way of a premium for those characteristics.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.
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