Jeff Immelt’s Next Big Problem: GE’s Business is Improving, But the Stock’s Ahead of Itself

General Electric (GE) finally has growth in its industrial businesses and cash coming from its finance division, and those accomplishments seem to clear up the two biggest problems that have plagued its shares for years. So should more investors be chasing this company and its 3% dividend yield? It depends on what kind of company you really think GE is.

GE is an unusual combination of a huge industrial company and a huge bank, GE Capital Corp., and investors traditionally value these two businesses in very different ways. The ramp up in profits from GE Capital paired with the corporate intention of shrinking its finance operations compounds the difficulty in assessing a fair price for GE shares. It’s one of the big reasons investors differ on their opinions about whether GE shares, now at a 52-week high, are still good value investments. A five-year stock chart shows the pain and he recent gain.

GE Chart

GE data by YCharts

After years of suffering the consequences of a financial sector meltdown, GE very much wants to be an industrial company now. Since 2007, when GE Capital contributed nearly half of its earnings, it has been selling financial assets to reduce risk and to focus on building up the aerospace/energy/medical/transportation part of the company. The industrial divisions recently started growing again, and a smaller, rehabilitated finance division is providing the cash.

But if GE is an industrial company, it’s one of most expensive ones out there. Its PE ratio is greater than those of General Dynamics (GD), Boeing (BA), Illinois Tool Works (ITW) or even conglomerate United Technologies Corp. (UTX). Actually, at a PE of nearly 20, GE shares are more expensive than GE shares have been since 2006.

GE PE Ratio Chart

GE PE Ratio data by YCharts

GE shares are no bargain when compared to big banks either. They trade at almost twice or more the valuations on Citibank (C), JPMorgan (JPM), Bank of America (BAC) and Wells Fargo (WFC).

GE PE Ratio Chart

GE PE Ratio data by YCharts

It does have almost all these companies beat on dividend yield, at least by a little. In fact, the promise of even higher dividends has particularly helped GE’s share price lately. Between regulatory requirements and overseas financial crises, steadily bigger bank dividends are much less certain.

Valuing GE shares as either an industrial or a financial ignores the advantage its shareholders are getting from all sides at the moment. GE Capital, which acted as a suction cup on the share price for many years, is profitable again and spinning out a lot of cash to the corporate parent; a $4.5 billion special dividend and the first of regular $475 million quarterly dividends, for starters. The money will build an industrial war chest while leaving the parent to use its current cash to raise dividends and buys back shares.

GE Cash and ST Investments Chart

GE Cash and ST Investments data by YCharts

Really, the potential cash from several angles spurred most analysts to carry buy or overweight ratings on the shares, although the share price now approaches several targets. There’s the probability of more asset sales at GE Capital, which look to be a lot more lucrative now that they’re back in the black. Also, there’s GE’s 49% stake in NBCUniversal and its option to sell it in 2014. That alone is conservatively valued at about $7 billion.

So are GE shares too expensive now for value investors? Most say no. Just don’t call it an industrial, or a bank, or a conglomerate….

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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