When General Electric cut its dividend to a penny per share for the course of 2019, after cutting it in half from $0.24 to $0.12 quarterly during the 2017-2018 time period, most investors kind of had the idea that GE was in trouble and stayed away from the stock because there is often some (justified I might add) criticism of the business on a seemingly daily basis.
Even today, people might take a casual glance at the stock, see it is trading at around $11 per share, and think, “Yeah, that is a stinker.” Of course, there is more to see than that. This time last year, the stock fell below $7 per share. Once a stock is down in the low single digit and low double-digits, every dollar change in the stock price may seem like much ado about nothing. But of course, we know that the investor who bought shares in the stock this time last year would now be sitting on a 57% one-year gain.
And the near elimination of the dividend has given General Electric a lot of capital to repair itself. A couple of years ago, it was paying out $7 billion or even $8 billion to shareholders as dividends. The problem with the business is that various insurance-related subsidiaries (such as not reserving nearly enough for its long-term insurance disability subsidiary) and even its power-related operations (harder to sell new gas equipment when oil prices have been low the past few years) have been suffering through difficult operating conditions.
But despite it all, General Electric is still earning profits of over $5 billion. With the dividend cut to a penny, nearly all of those profits can be used to rebuild the business by funding capital reserves, investing in the continued development of its industrial operations, and so on. Dividend cuts among companies that retain billion-dollar profits after the dividend cut are often the best candidates for recovery because the issues that caused the dividend cut can be addressed rather than paid out to shareholders as dividends. It’s basically Bank of America in industrial form.
Over the coming five year pull, I think investors are going to see General Electric stock grow its earnings from $0.60 per share to somewhere around $1.25 to $1.50. With a possible P/E rati of 17 to 20, we are looking at a future price of $21 to $30 per share sometime during the 2024-2026 stretch.
If General Electric was maintaining its dividend of $0.12 per share from 2018, it would be paying out nearly all of its $5 billion in annual profits as dividends. Under those circumstances, stagnation and malaise could have been in the offing for half-a-decade because there would have been no real substantial/excess capital to fix the business.
There is also the fact that GE Healthcare remains a jewel (and Culp recognizes it as an extreme cash cow because he comes from Danaher which is essentially a conglomerate that aggregates highly cash-generative businesses in the health-care field) and seems to have been wisely taken off the chopping block.
This means that General Electric continues to have a health-care arm that is generally substantial profits and nearly all of those profits are now available to fix the power, aviation, and industrial segments of the business.
General Electric has been left for dead because it has disappointed shareholders for about twenty years now. But there is a reason why every investment prospectus contains the adage “Past performance is no guarantee of future returns.” Bank of America investors lost their shirts from 1999-2009, but from 2009-2019, there were not many better places to invest. Being a Bank of America shareholder means very different things if you’re a “2009 Bank of America investor” or a “1999 Bank of America investor.” I suspect that dichotomy will play out between the “2019 General Electric investor” and the “1999 General Electric investor.”
If you study the GE Healthcare arm, observe the $5+ billion profits that are not earmarked for dividends or other commitments, and see the sustained low stock valuation, you are going to view this historically significant conglomerate differently than most of the financial press.