The Worst Mistake General Electric Investors Can Make Right Now
The slide in oil prices to around $50 a barrel has made investors wary of American conglomerate General Electric . GE's oil and gas division was its fastest-growing industrial business in 2014 and accounted for 17% of the segment's revenue. Owing to the oil price volatility, the company expects this segment to report flat to down 5% on the top and bottom lines in 2015. The stock price is currently down 12.2% to around $24 from its 52-week high of $27.53. However, investors who lose faith and abandon the stock could regret their decision in years to come. Here are three reasons GE looks sturdy and is worth every penny.
GE gas turbines. Source: General Electric.
Exposure to growth industriesGE offers a good option to investors looking to be part of growth industries such as aviation and power. In its latest market outlook, American aero major Boeinghas forecast that 36,770 new airplanes will be delivered between 2014 and 2033. GE, which makes airplane engines and components under its aviation unit, could be a part of this growth.
GE's engines are on some of the most popular airplanes. The GEnx engine powers Boeing's Dreamliner 787 and 747-8, and is the company's fastest-selling engine, with more than 1,300 on order. The CFM product line, which consists of six engine models, has been fitted in more than 10,967 aircraft, including Boeing's 737 Next Generation models andAirbus'A320 family of airplanes.
GE's latest offering is the LEAP engine, selected as the exclusive option for the Boeing 737 Max, which is scheduled to enter service in 2017.On the fourth-quarter earnings call, management announced, "Our total win rate for the LEAP since launch is now at 79% on narrowbody aircraft." This is a big development given that single-aisle planes will be commercial aviation's fastest-growing segment in the coming two decades.
GE forecasts its annual engine production volume (including joint venture engines) to increase at a CAGR of 4%, from 2,600 in 2013 to 3,300 in 2020. It also expects the number of engines on in-service fleet of aircraft to grow from 33,000 in 2013 to 44,000 in 2020, which will add to service revenue.
Source: Boeing Current Market Outlook 2014 presentation.
GE Power, the highest contributor to GE's industrial revenue and profit, is another crucial segment in which the company is doing a lot to capitalize on future demand. GE is the world's largest producer of heavy-duty gas turbines and has an installed base of more than 10,000 gas and steam turbines in 120 countries.
GE's study shows that power-generation requirement would grow by 3,400 GW or to the tune of $5 trillion in the next 10 years. The company is preparing to leverage this growth and has recently acquired the energy assets of Alstom. GE's strength in natural gas paired with Alstom's strength in coal solidifies the former's position in the power generation market.
Plenty of cash rewards comingIn the words of CEO Jeff Immelt, "Returning cash to shareowners remains our top priority, while we continue to invest in long-term growth." In 2014, GE returned $11 billion to shareholders through dividends and buybacks.
GE is hoping to generate $12 billion-$15 billion in free cash flow from the disposition of non-core businesses in 2015. It plans to return $10 billion-$30 billion to shareholders during the year: $9 billion through dividends,and the remaining $18 billion-$20 billion through the spinoff of GE's consumer lending business Synchrony Financial.
The conglomerate announced a 4.5% hike in its quarterly dividend to $0.23 a share in December. This works out to $0.92 per share annually. With the current dividend yield of 3.7%, the company has one of the best yields among Dow Jones Industrial Average components, according to 24/7wallst.
GE's available cash and allocation of capital in 2015-2016. Source: GE presentation.
Backlog at record levelsGE finished 2014 with an enormous backlog of $261 billion, the highest ever in the company's history, and up by $17 billion from the previous year's levels. In 2014, the aviation segment saw its backlogs increase by 7% to a record $134 billion. Transportation was another big gainer: backlogs increased by 43% to $21 billion.
Total orders were up 7% year over year in 2014, and this was driven by 10% growth in service orders. Service orders tend to be more lucrative as they carry higher margins than equipment orders.
Orders received in Q4 2014. Source: GE presentation.
TakeawayDespite the volatility in oil prices and the weak outlook for the oil and gas business, GE offers several incentives for investors. The conglomerate's diversified portfolio gives exposure to several industries with good growth prospects, and a strong backlog puts it in good stead. GE pairs these positives with attractive cash returns -- plausible reasons for investors to stay put rather than withdraw.
The article The Worst Mistake General Electric Investors Can Make Right Now originally appeared on Fool.com.
ICRA Onlineand Eshna Basuhave no position in any stocks mentioned. 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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