There are no gods. There are no kings. There are no heroes on Wall Street. There only are stocks, which go up and down--mostly down lately, a fact General Electric's 2.2 million individual investors can't escape. Even after Jack Welch retired as CEO of GE (GE) last year, many kept faith with GE shares. After all, they had seemed for so long to be guided by a higher power. Yet with GE lately dipping below $23 a share (chart), from above $60 in little more than two years, GE has sunk even farther than the blue-chip indexes.
In fact, with a dividend yield near 3%, GE today sits on the threshold of the kennel that holds the 10 highest-yielding stocks in the Dow Jones industrial average, the so-called "Dogs of the Dow." (The stocks are down so much that the dividend yields are high.) Once wonderment over that plain fact fades, a question arises: Could a thinking investor now buy stock in GE?
This will be puzzling plenty of investors between Oct. 11, when GE is set to report its third-quarter results, and early December. Then, it is expected to issue its 2003 forecast and will probably indicate its dividend policy for the year ahead. To hazard an answer, I decided to try a couple of different approaches.
First, I compared the stock market valuations of rivals in each of GE's 11 operating segments. For example, for GE's consumer-products segment, which comprises its appliance and lighting units, I checked the current price-to-sales ratios for Whirlpool (WHR), Maytag (MYG), and Philips Electronics (PHG). For NBC, I looked at Viacom (VIA), owner of CBS, plus ABC's parent, Walt Disney (DIS). And so on.
This is a crude process, true. No company's products and prospects are exactly comparable with those in any GE segment. Nor, since profit margins differ, is a dollar of revenue at GE necessarily equal to a dollar of revenue at Siemens (SI) or DuPont (DD). This method also fails to account for the edge GE gets from its AAA credit rating. Yet comparing price-sales ratios offers a couple of advantages: First, it exacts a kind of rough justice, just the sort the market has been meting out lately. Second, by focusing on sales, it sidesteps concerns over the quality of GE's earnings, which have been buoyed by such nonoperating factors as pension income and investment gains.
In any case, the result is far from bullish (table). Even after erring on the high side, by consistently using the more generous of two or three rival companies' multiples, I found the total of these estimated values came to about $23 a share. Next to its rivals, GE today appears neither much too cheap nor way too expensive.
Next, I came at GE from a second direction. Suppose an investor wanted an average annual total return of 10% on an investment in GE over the next three years. How fast must GE's profits and dividends grow? What earnings multiple is needed?
GE's current dividend yield of about 3% gives the stock a nice head start. Although growth in the dividend this year slowed to 12.5% from 17%, assume that rate levels off at 12% for the next three years. Assume, too, that investors keep giving GE a price-earnings multiple of 15 as they do now. In this case, for an investor to see a 10% annual average return, GE's net must go up at 6% a year. That, it turns out, is Wall Street's consensus forecast for GE's 2003 profit growth.
This scenario--or more bullish ones--is surely possible. Just the same, it's worth questioning if the market would keep paying 15 times earnings for 6% growth. For that matter, would GE keep raising its dividend 12% annually as profits grew just 6%? Adjust the dividend growth assumption to 8% and the p-e ratio to 12, and GE looks decidedly less appealing. At that, its annual average total return would be less than 3%.
The numbers can be played with in all kinds of ways. Yet to me, their message is pretty clear: GE's fall from grace is history. What lies ahead is a long and steep road, crowded with many other all-too-common stocks. By Robert Barker