Thinking of buying GE stock? Here’s what you need to know.
One of the original 12 companies comprising the Dow Jones Industrial Average, General Electric (EG 1.30%) has long held a place among the most revered companies in the stock market. Nowadays… not so much. He lost his place on the Dow Walgreens Boot Alliance in 2018, and over the past three years, its stock has fallen by 75%.
But investor sentiment about GE could change. It is now one of the 100 most popular stocks among users of the Robinhood trading platform, and the online brokerage firm notes that 63% of the analysts it tracks rate the stock favorably. With new attention growing for this old name, now is a good time to consider some of the things potential investors should be aware of before adding GE to their portfolios.
Build a better balance sheet
Like so many other companies that fell into financial difficulty in 2008, GE’s balance sheet has become increasingly precarious. At the height of the Great Recession, the company’s total debt, for example, soared to nearly $524 billion. Over the past 12 years, however, the company has taken aggressive steps to shore up its finances. For example, in 2015 the company disposed of $157 billion in assets from its financial services arm, GE Capital.
Much to the chagrin of dividend investors, GE cut its quarterly distribution twice in 2018 to preserve cash. However, while the quarterly report dividend is now at $0.01 per share – a drastic reduction from the $0.24 per share it returned to shareholders in 2017 – the company’s balance sheet is on much stronger footing. At the end of the second quarter of 2020, GE had total debt of $82 billion and $41 billion in cash.
The winds of change
For those who haven’t had GE on their radar recently, its improved financial situation may come as a surprise. The same goes for the company’s focus on renewable energy. For years, GE has been a recognizable name in the wind industry as a major global turbine supplier. But a recent announcement highlights its commitment to clean energy: GE will no longer build new coal-fired power plants.
Addressing the decline of the coal industry and the growing opportunities in wind power, Russell Stokes, president and portfolio chief executive of GE Power, was quoted as saying that the company is “focused on generating businesses electricity companies that have an attractive economy and a growth trajectory”. “As countries strive to meet the goals of the Paris Climate Agreement, wind power is increasingly present in the global energy landscape. According to market research firm Mordor Intelligence, the combined onshore and offshore wind turbine market is expected to grow at a compound annual rate of more than 10% from 2020 to 2025.
Demonstrating its leading position in the wind industry, GE announced last week that it had finalized contracts to be a key supplier to what will be the world’s largest offshore wind facility, Dogger Bank Wind Farm in the UK. . In addition to a five-year service contract, GE will supply 190 Haliade-X wind turbines for the installation.
The turbulence remains
Although GE appears to have charted a new course in the right direction by avoiding coal and embracing renewables, those who invest in it will no doubt have to be prepared for short-term volatility due to the challenges facing the aviation industry is facing. Over the past six months, GE reported an 89% decline in segment profit in aviation compared to the same period last year. And it doesn’t look like this business will rebound in the near future. The company also reported a 35% drop in orders from its aviation segment compared to the same six-month period last year.
Despite the challenges, the company remains committed. On the Q2 conference call with analysts, GE CEO Larry Culp acknowledged the headwinds facing aviation. “We expect the market to decline sharply this year and likely a slow multi-year recovery,” he said. “Over the long term, however, the aviation market has strong fundamentals, and we are committed to protecting the future of this business and our leadership position within the industry.”
Is GE a good idea after all?
With its focus on renewables and its decision to stop serving the needs of the declining coal industry – in addition to its stronger financial position – it’s understandable why investors have been so keen on GE’s stock lately. . For investors with a higher tolerance for risk and a willingness to deal with short-term volatility, GE seems worth considering.