Stock Analysis: General Electric

Linked here is a PDF copy of my detailed analysis of General Electric Company (GE) (alt.1, alt.2). Below are some highlights from the analysis:

Company Description: General Electric (GE) is a diversified technology, media and financial services company. With products and services ranging from engines, power generation, water processing to medical, financing, media and industrial products.

Fair Value: I consider four calculations of fair value: 1) Avg. High Yield Price, 2) 20-Year DCF Price, 3) Avg. P/E Price and 4) Graham Number. GE is trading at a discount to 1) and 3) above. If I exclude the high and low valuation, and average the remaining two valuations, GE is trading at an 8.2% discount. A Star is added since GE is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors: 1) Rolling 4-yr Div. > 15%, 2) Dividend Growth Rate, 3) Years of Div. Growth, 4) 1-Yr. > 5-Yr Growth and 5) Payout 15% of avg. GE earned one Star in this section for 3) above. GE has paid a dividend since 1899 and has increased its dividend for the last 20+ years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered: 1) NPV MMA Diff. and 2) Years to >MMA. GE earned one Star in this section for 2) above. If GE grows its dividend at 7.8% per year, it will only take 4 years to equal the long-term average money market rate of 4.61%. GE's NPV MMA Diff is less than the $10,000 I prefer. However, since GE is a Blue-Chip company with a long track record of success, I am comfortable with its NPV MMA Diff of $5,862.

Other: GE is a member of the S&P 500, an Aristocrat and an Achiever.

Conclusion: GE earned a Star in the Fair Value section, earned a Star in the Dividend Analytical Data section and earned a Star in the Dividend Income vs. MMA section for a net total of 3 Stars. This rates GE as a 3-Hold.

In April, GE shocked the U.S. stock market by reporting a 6% drop in first quarter earnings and slashed its 2008 earnings outlook. During its quarterly conference call, Chief Executive Jeff Immelt blamed the miss on Bear Stearns near bankruptcy. "We had planned for an environment that was going to be challenging...[but] after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales," Immelt said.

"We are not counting on the business getting any better, vis-à-vis...the U.S. consumer," Immelt said. "We have actually allowed for a worsening of the U.S. consumer in our GE Money business. So I think that is the way to think about the U.S. and the U.S. economy."