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Published: October 12, 2010
It's not easy following in Jack Welch's footsteps, who
practically wrote the book on how to grow a business. Ever since
taking the reins in early 2001, Jeff Immelt has consistently
paled by comparison, having little to show for his first decade
at the helm of General Electric (NYSE: GE). On a
compounded basis, sales have grown less than +3% annually during
his tenure.
But all that is about to change.
GE is almost done repairing the damage that was wrought by the
global economic carnage of 2008, and the company is again
gearing up to play offense. You won't notice it in the
near-term, as GE's revenue is expected to shrink a bit more in
2010 and 2011. But the stage is now being set for a robust
return to growth in 2012 and beyond.
Immelt is counting on three factors to propel growth. First,
he's decided to step up R&D funding from 3% to 5%. That means GE
will be spending more than $30 billion every year to ensure that
each of GE's operating divisions have industry-best products.
Second, he's breaking out GE's checkbook. Already in October, GE
has announced plans to acquire energy services firm Dresser for
$3 billion and another $1.5 billion to buy up a consumer finance
unit of Citigroup (NYSE: C). The latter move is a notable
turnaround for GE. The company was backpedaling from too
much exposure to finance in 2008 and 2009. Now that GE's
financial arm is once again strong, the company can snap up
rivals that are still on weak footing.
GE's acquisition track record is not especially impressive. The
company completed 196 deals in the last five years, according to
Bloomberg, but not all of those deals panned out -- especially
the larger ones. GE is now committed to stick with simpler deals
-- in the $1 billion to $3 billion range -- in a bid to simply
augment current divisions. In the past, bigger deals were aimed
at instantly changing the landscape of an entire industry.
The third leg of growth: the economy. GE is considered to be a
late-cycle play, which means that its industrial businesses such
as gas turbines, jet engines and locomotives tend to see much
greater investments once economic growth is clearly underway.
That's not likely to materialize for at least another 12-18
months, which is why GE isn't getting a lot of buzz in financial
media circles right now.
All about the yield
For many investors, GE's health can only be measured in the size
of its
dividend payout. GE was forced to cut its dividend in half
in 2009, the first such cut in more than 30 years. The annual
payout, which peaked at $1.24 a share in 2008, recently fell to
as low as $0.40. In late July, GE boosted the dividend back up
to $0.48 while also earmarking
cash flow toward an ongoing $11 billion stock buyback.
That generosity comes as GE is
again on a course of prodigious cash flow. GE generated more
than $20 billion in
free cash flow in 2008, but saw that drop to $7 billion last
year -- though it should be back up above the $10 billion mark
by next year. More importantly, the steps above should help free
cash flow rise back to at least $15 billion by 2012 or 2013, and
that should enable GE to boost the dividend back up to around
$1, which would translate into a dividend yield of more than 6%
(and closer to 7% if GE completes the planned $11 billion stock
buyback before then).
From less bad to good
In the near-term, GE is all about getting healthy. Revenue at
the company's all-important finance arm is likely to be flat,
but portfolio losses (and the reserves against them) are
shrinking quickly. That fully accounts for expectations that
GE's per share profits will rise more than +15% in 2011 to
around $1.30. As a point of reference, GE earned an average of
$1.90 a share in 2005 through 2007, and there's no reason that
profits can't return to those levels once the late-cycle
businesses kick in. Shares trade for less than 10 times those
normalized
earnings, and as noted, also offer the chance of a very
juicy dividend yield for those willing to buy now and wait a few
years.
Action to Take --> This is
not the sexiest name in the stock playbook. Many other companies
have even higher growth prospects or lower valuations. But GE
once was -- and will once again be -- a core blue chip holding
for many mutual funds and pension funds. As they add GE back
into their portfolios, shares should see a steady rise in demand
-- which is why now is a good time for individual investors to
pick up the stock. The worst has passed for this stumbling
giant, and Jeff Immelt may finally soon get the vindication that
has long eluded him.
-- David Sterman
Staff Writer
StreetAuthority
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