3 Reasons to Buy General Electric That Have Nothing to Do With its Dividend

By John BromelsFool.com

Image Source: GE


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No company exemplifies power, in all senses of the word, like General Electric (NYSE: GE). From its products (power systems, engines, even light bulbs) to its industry clout, GE is one powerful company. And I think it's going to bring that power into its investors' portfolios over the next several years. Here's why

Image source: GE

1. The power of sizeGE is one massive company. It's the ninth largest company in the world, according to Forbes. But as we all know, for investors, bigger isn't necessarily better. For a large industrial conglomerate like GE, though, size has a lot of advantages.

One benefit of GE's size is the amount it can spend on research and development. In 2014, GE spent $4.2 billion on self-funded R&D, or about 3.7% of its total revenue. More money spent on R&D equals (generally) more patents, more innovation, and more sales. The technologies GE develops through all of its R&D spending are of special benefit to the company because of its industrial diversity. As a result, the "domain expertise" GE's businesses acquire in various technologies, systems, and materials can then be applied to its other product lines.

Take, for example, the LEAP aircraft engine. GE Power's scientists developed ceramic matrix composites, or CMCs, for use in gas turbines for power generators. CMCs were not only lighter than metal but could also withstand higher temperatures, improving turbine efficiency. That same CMC technology was then adopted for its aircraft division.

When the first LEAP engines -- the first aircraft engines to feature CMCs in their "hot sections" -- enter service next year, they will be 15% more fuel-efficient than existing models and could save airlines up to $1.6 million per plane in annual fuel costs.More important for investors, the engine has become the best-selling in GE Aviation's history. This is the kind of cross-industry innovation that only size can offer.

Image source: GE

2. The power of a brandI'm a big believer in the ability of a strong brand to create lasting value for a company, and GE has one of the strongest in the world. Forbes values the company's brand at an estimated $37.5 billion.

GE's powerful brand is especially important, given the products that earn it most of its revenue -- expensive, high-tech industrial machines and systems. Why is that important? Say I'm a devotee of McDonald's, there's not much to prevent me from trying out Burger King every now and then. If I don't like it, I haven't spent much and I can always go back to Mickey D's next time.

On the other hand, if I'm a company that manufactures a multimillion-dollar aircraft, I have a huge problem if I order a faulty or substandard engine. So I'm not likely to pick one up from Big Bob's House of Discount Aircraft Parts: I'm going to go with a reliable brand like GE. Which brings up a related issue: barriers to entry.

It's not exactly cheap or easy to start an industrial-equipment company that builds something like wind turbines or high-voltage transformers. Setting up a production facility alone would be a monumental undertaking. This isn't to say that it never happens (SpaceX and Tesla Motors have certainly managed it), but the advantage is solidly on the side of existing, established companies like GE.

3. The power of the futureEven a large company with a respected brand can run into trouble if its industry becomes obsolete. Smith-Corona, for example, was one of the largest and best-respected manufacturers of typewriters and mechanical calculators through the 1960s. But it went bankrupt in 1995, after electronic calculators and PCs rendered its products obsolete.

GE's product lines aren't about to go the way of mechanical typewriters. The industries in which it operates -- transportation, power generation and management, and healthcare -- should continue to be vital for decades, if not centuries. And GE's talent for innovation is helping it to stay at the forefront of these important industries. In 2014, for example, GE developed the LEAP engine for aviation; a new model of freight locomotive that's the first to meet the EPA's Tier 4 emissions standards; the world's most efficient gas turbine to date; and a new model of medical PET scanner that's three times more sensitive than its predecessors.

Even better for investors, the company is doubling down on its investment in its large-scale industrial markets by spinning off its retail finance business, Synchrony Financial, and by selling its appliances division to Sweden's Electrolux. These moves help to focus the company on its core industrial businesses and gives the company a little extra cash it plans to largely return to shareholders.

The Foolish bottom lineGE isn't a flawless company. It got into big trouble during the financial crisis as a result of its financial-services arm, GE Capital. It has also -- like any innovator -- made investments in some industries that haven't panned out -- notably, forays into solar panel manufacturing and batteries.

But CEO Jeff Immelt seems to be keenly aware of GE's strengths and is working to maximize them to make the company even stronger. I predict shareholders will benefit in the short term as the company executes its immediate plans to return value to them, and that GE's size, brand power, and ability to innovate will yield increasing shareholder value in the medium-to-long term. In short, Ge has a bright future ahead it's likely a good time to buy into that future.

The article 3 Reasons to Buy General Electric That Have Nothing to Do With its Dividend originally appeared on Fool.com.

John Bromels owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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