Just what us value investors were all waiting for! The S&P 500 is down some 3.9% over just the last couple days after Ben Bernanke, the Federal Reserve Chairman, hosted a news conference discussing the possibility of cutting back on some of the stimulus to the economy via quantitative easing. Of course there’s a lot more going on. There are concerns over slowing growth in China, the rising of interest rates and a broader stock market that was already a bit frothy anyway. The funny thing is that investors seem to be forgetting the reason why the Fed is discussing slowly scaling back on stimulus: the economy is improving. However, I’m glad that Mr. Market is so short-sighted. Makes for great days like today when prices are falling and I’m shopping!
There was a lot of action going on today. I chose to ignore all the noise and narrow my interest on some of the companies that I’ve been focusing on lately. It was a tough call, as there were a few companies that looked fairly appealing today, but ultimately it comes down to having limited capital and making due with such.
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I discussed some of the reasons I really like GE recently, but I’ll discuss some aspects of the company in greater detail here. Before I begin, let’s keep in mind this company was founded by Thomas Edison and it’s been paying dividends since 1892. Thomas Edison. 1892. Let that sink in for a second.
First, this is probably a controversial purchase for a dividend growth investor like myself, because GE was forced to cut their dividend back in 2009 by 68% from $0.31 per share to $0.10 per share. What was even worse about this cut – ending a 32-year streak of rising dividends – was that management kept insisting the dividend was safe all the way up to the cut. Although the cut wasn’t quite as dramatic as some of the big banks cuts were, it still burned.
The dividend cut was necessary because GE Capital, the banking division within the industrial conglomerate, was causing massive disruptions to the rest of the business due to risky real estate loans. The problem was that GE Capital had become such a large part of the business (upwards of 50% of all earnings at the time) and at the same time real estate had started falling in value, creating a headache for the balance sheet.
But things have changed in the last few years. GE has been focusing on core assets as it sells off non-core businesses. It recently completed the sale of NBC Universal for $18 billion and it’s also reducing the size of GE Capital. The company recently announced that GE Capital would be paying a $6.5 billion dividend to parent GE so as to continue reducing the size of GE Capital as that money will be used to focus on core businesses and returning value back to shareholders. GE plans on reducing GE Capital from about $600 billion in assets it had in 2008 to a goal of $300-$400 billion going forward.
GE, as it stands today, is extremely diversified. While GE Capital still accounts for about 31% of revenues today, the Power & Water (at 19%), Oil & Gas (10%), Aviation (14%) and Healthcare (12%) segments all account for large parts of the revenue as well. 52% of sales come from outside the U.S.
I think that the future of GE looks a lot brighter than its recent past as it focuses on energy infrastructure and away from financial services. GE predicts that about $60 trillion of infrastructure investment is needed worldwide by 2030 to support rising middle class consumers in emerging economies, and they want to be at the forefront of that business. They currently have a backlog of $210 billion, so they’re doing well in that regard.
Obviously, dividend growth is a priority for me. Check this out, from the 2012 Annual Report:
“Second, we are committed to allocating capital in a balanced and disciplined way, but with a clear priority for dividend growth. GE will generate $100 billion for allocation over the next few years, including cash from existing operations, dividends from GE Capital and dispositions. The top priority remains growing the dividend. Since 2000, we have paid out $106 billion in dividends, more than any company except Shell, and more than we paid out in the first 125 years of the Company combined. We like GE to have a high dividend yield, which is appealing to the majority of our investors. We plan to buy back shares to get below 10 billion, where we were before the crisis. We will make significant progress toward that goal in 2013 by allocating a significant portion of the NBCU cash to repurchase our shares. In total, we plan to return $18 billion to investors this year through dividend and buyback.”
It’s not all talk, either. GE has raised the dividend 5 times since the 2009 cut and I believe many more raises are ahead of us. Factoring everything together, I really like where GE is headed. Currently trading for a P/E of 16.25, I think shares are attractively valued here. At $0.19 per share quarterly, the entry yield on my purchase is 3.25%. Not bad. Using a Dividend Discount Model to value shares and using my usual 10% discount rate and 7% long-term dividend growth rate I get a Fair Value of right about $27 per share. I think the company is attractively valued here, and I was looking for a price below $23.50 to purchase shares and that’s exactly what I did.
This purchase adds $53.20 to my annual dividend total based on the current payout. I just missed the next dividend payout, but the drop in share price today more than made up for that.
I currently have 36 positions in my portfolio after this purchase, as this was yet another new high quality investment.
Some current analysts opinions on my recent purchase:
*Morningstar rates GE as a 4/5 star valuation with a Fair Value Estimate of $27.00 per share.
*S&P rates GE as a 4/5 star Buy with a Fair Value calculation of $24.00 per share.
I’ll update my Freedom Fund in early July to reflect my recent addition.
Full Disclosure: Long GE
What are you buying?
Thanks for reading.
Photo Credit: Stuart Miles/FreeDigitalPhotos.net