GE Analysis {Part I }
General Electric. (Closing Price $11.10) {February 7, 2009}
What follows is a serial publication of an investment report I did for the clients of our firm. You should consult your own research or your own advisor before taking any action based on this report. I did not personally own an GE at the time of this publication. This report is I believe a good indication of the value we add as a firm to client's investments.
What follows is a serial publication of an investment report I did for the clients of our firm. You should consult your own research or your own advisor before taking any action based on this report. I did not personally own an GE at the time of this publication. This report is I believe a good indication of the value we add as a firm to client's investments.
I indicated that I would do some investment work on General Electric {hereafter GE} given the large interest in this company among clients and friends of Lumen Capital Management, LLC. What follows is our analysis of the company per each metric that we follow. These metrics are: fundamental analysis of the company’s business, the company’s position relative to the overall structure of the stock market, a money flow analysis of the company’s stock and finally a valuation study. I will wrap this up at the end with some of my thoughts regarding the stock.
Fundamental Analysis:
Since GE’s business is well known I want to discuss what currently weighs on the stock.
First GE as a global diversified industrial, financial and media conglomerate is finding all of its operations severely impacted by the contraction in the global economy. GE’s CEO Jeff Immelt has said “that The US economy is in its worst shape since the deep recession of 1974 and 1975 and if it deteriorates further the most meaningful comparisons will be to the Great Depression”. It was once said that 1 cent of every dollar passed in the US passes through GE’s fingers. If that is true then GE cannot help be see its business lines contract.
The main source of concern among investors is the precarious nature of its balance sheet through GE Capital. The market was shocked last fall when GE went into what must be described as emergency mode by selling to among others preferred shares to Warren Buffett at highly favorable terms. Buffett received preferred shares with a 10% annual dividend. These shares can be bought back by the company after 3 years at a 10% premium to his purchase price. Buffett also received warrants to buy company stock at any time during the next 5 years @ 22.50 per share. In addition to shore up its balance sheet the company also sold common stock which dilutes current shareholders.
Since the economy has continued to deteriorate the market has become more skeptical that GE can maintain the dividend at the current rate and that it can keep its AAA rating without a dividend cut. This is the likely reason for the additional weakness in the shares. GE has stated that the dividend is secure through 2009 and has authorized its regular quarterly dividend of .31cents per share, payable April 27 to shareholders of record February 23. But you should know there is much chatter in the markets that GE will not be able to pay this dividend rate all year in spite of what the company says.
Analysis: I do not know whether the company can continue to pay the dividend and keep its AAA rating. With a current yield over 11% the market is telling you that it does not think this is possible. I think there is a possibility that the market would view a dividend cut as a positive because it would alleviate some of the concerns regarding the balance sheet. Thus I would view a dividend cut at these levels not necessarily a bad thing regarding price performance. I think there is a higher than average probability that the dividend will be cut by the end of the year.
Fundamental Analysis:
Since GE’s business is well known I want to discuss what currently weighs on the stock.
First GE as a global diversified industrial, financial and media conglomerate is finding all of its operations severely impacted by the contraction in the global economy. GE’s CEO Jeff Immelt has said “that The US economy is in its worst shape since the deep recession of 1974 and 1975 and if it deteriorates further the most meaningful comparisons will be to the Great Depression”. It was once said that 1 cent of every dollar passed in the US passes through GE’s fingers. If that is true then GE cannot help be see its business lines contract.
The main source of concern among investors is the precarious nature of its balance sheet through GE Capital. The market was shocked last fall when GE went into what must be described as emergency mode by selling to among others preferred shares to Warren Buffett at highly favorable terms. Buffett received preferred shares with a 10% annual dividend. These shares can be bought back by the company after 3 years at a 10% premium to his purchase price. Buffett also received warrants to buy company stock at any time during the next 5 years @ 22.50 per share. In addition to shore up its balance sheet the company also sold common stock which dilutes current shareholders.
Since the economy has continued to deteriorate the market has become more skeptical that GE can maintain the dividend at the current rate and that it can keep its AAA rating without a dividend cut. This is the likely reason for the additional weakness in the shares. GE has stated that the dividend is secure through 2009 and has authorized its regular quarterly dividend of .31cents per share, payable April 27 to shareholders of record February 23. But you should know there is much chatter in the markets that GE will not be able to pay this dividend rate all year in spite of what the company says.
Analysis: I do not know whether the company can continue to pay the dividend and keep its AAA rating. With a current yield over 11% the market is telling you that it does not think this is possible. I think there is a possibility that the market would view a dividend cut as a positive because it would alleviate some of the concerns regarding the balance sheet. Thus I would view a dividend cut at these levels not necessarily a bad thing regarding price performance. I think there is a higher than average probability that the dividend will be cut by the end of the year.
To Be Continued Next Week....Coming Tuesday money flow analysis.
posted by CR English at 6:10 AM
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