Please refer to the previous article (Part 1 of 2) before continuing as going forward I will assume that you have read the first.
When someone invests in a company like GE you are betting on management being able to navigate through all the changes and challenges that may arrive. This is a unique factor that only a handful of companies can claim to have (3M Company, United Technologies just to name a few). Being battle tested & survived & thrived for as long as GE has, this factor overrode the changes in the companies products. The other factor that occurred to me as well is, many of GE's products don't change for DECADES, a stark contrast to cloud software, social media, entertainment, and other technology companies who can become obsolete in under 3 years. Even the now defunct divisions lasted for decades. 100 years didn't change the fact people need light bulbs & appliances. 100 Years didn't change the fact people need healthcare equipment like X-Ray machines, or jet engines which the company has made for over 70 years, & many other products that have not become obsolete for well over the 50 year mark. The factors of a wonderful management culture and products that are viable for the long term albeit may change eventually is enough to warrant a long term holding right next to a company like Coca-Cola.
* I am in no way recommending any particular stocks/investments in this article for anyone - This is just my personal opinion. Please do not act without doing your own research, consulting & deciding your own goals.
NOTE: Going forward I will assume you have read the first post. Please read Part 1 first.
Another factors that came up with GE is many industrial type companies tend to be cyclical companies that can NEVER be held for the long term. Also, the last 12 years under CEO Jeff Immelt has been one of the most challenging times for the company in a VERY long time, with the 9/11 attacks/Dot-com bubble combo and the 2008 recession that brought GE to its collective knees definitely made me weary as well. But I also knew as well, those reasons I listed are TERRIBLE reasons not to do research into the company, I was determined to find out what the really happened.
Many older investors will remember the late 90's Dot.com bubble where mainly large cap companies were trading at ABSURD valuations. Coke at 60 PE, Wal Mart at 55 & included in that mix was GE selling for a 45 PE!! There was NO WAY GE under ANY circumstances could live up to that type of expectation no matter what happened. It would take years if not decades before the investor started to get a return on his investment. The other part was 9/11 & the mini recession that followed, Mr. Immelt took over only a few months before, as the legendary Jack Welsh retired. Despite the recession that hit, GE's earnings held up very well (in fact they grew,), and the dividend was raised as well. A sign the company was doing just fine. An absurd valuation, a catastrophic event like 9/11, and bad timing all made for a perfect storm for an investor to lose his shirt. This time period I wrote off as not reliable to use for many factors. It wasn't a cyclical economic cycle or poor products it was largely factors the company could NEVER control & most likely would never happen again. However 2008 was a whole different story, that largely fell on GE for getting a little complacent.
Many people will point to GE being a industrial type company as the reason you could not own it as for many cyclical= industrial. This is not the case at all why GE nearly fell on it's face in 2008. The industrial side held up VERY well during the crisis, in fact profits grew from the industrial segment. Which was VERY surprising for me to see. It was not the jet engines and appliances that got GE into trouble, it was 25% NBC Universal & 75% GE Capital which had held many sub prime mortgages in its portfolio, the consumer credit card segment suffered huge losses, the Commercial division suffered as well with many risk assets as well. The company had just let GE capital grow bigger & bigger for the last few years as they found it easier to just use GE Capital to grow profits with risky assets than grow it from the industrial division, at one point GE Capital was over HALF of the companies profits! This not only resulted in HUGE profit losses but also the dividend being cut as well to help supplement the liquidity crisis, GE had raised the dividend every year through four decades. While this scared me at first, I did realize that this did not happen overnight, any investor could have seen the bank was growing bigger & bigger and could have sold out or adjusted to the changes (this was obvious for at least 7-8 years) once they realized the industrial segment was just a minority segment to GE Capital. Despite all this, the company was able to see things through the crisis and decided it was time to return to it's roots.
The GE of today is a FAR cry from the one that existed from 2002-2009. The NBC segment is gone, GE is spinning off the consumer credit division, the industrial segment will be 75% of the companies profits (already it is the majority of profits), the dividend has been raised every year since the crisis, the U.S. real estate is gone, the risky assets are gone and the bank has been scaled down significantly and is much more focused on industrial related profits instead of other banking sectors best left to Wells Fargo & Bank of America. This company is truly once again the industrial company of the last 100 years preceding the turn of the century. This demonstrated to me that while GE would have to be monitored more so than KO, it was still a terrific business especially now that the company is truly a industrial once again. The slight cyclical elements of the industrial segment was largely offset by the product diversification, global diversification, the overall importance of many of the products they make that are not luxuries, the backlog of orders in advance, and the newest asset GE Capital which gives the company a huge advantage in financing purchases and borrowing money.
I have no doubt that General Electric Company will still be around well after I am gone, and even bigger than today. The barriers to entry are massive, a college student cannot build jet engines or nuclear plants or even more crazier ALL seven of the industrial segments and disrupt the industry as social media or Amazon has. The brand equity is among one of the best. While the company (especially the bank's liquidity ratio) has to be checked every 6 months or so this is largely a company that one could just read the annual report once a year make sure everything's ok and as long as the price isn't 42 times earnings just buy & hold. The company is a cash machine that spews off more money than it knows what to do with and has made it clear it will make up for 2009 & get that dividend growing once again for the long term. The company is also not as cyclical as many would believe, and with the cleaning of house over the last several years GE has truly emerged as a long term investment worthy of being next to the greatest companies of all time. While I am almost 95% sure that AT LEAST 27 out of the 30 current Dow 30 companies will still exist in some way or form I'm almost 100% sure that General Electric will still be there as it has for the last 100. As well, I see a future Dividend Aristocrat returning.
