Dueling Fools
Generals at War
February 10, 1999
General Electric Bull's Pen
by Selena Maranjian ([email protected])
Take a gander at a chart of General Electric's stock price over the last ten years, and you'll see a fairly straight line, headed northeast. Such a graph suggests that the company is well managed, encountering few developments for which it's not prepared. In that period, the stock price zoomed from roughly $13 to $100, about a 25% annualized return (not including dividends).
Let's review a few reasons to love this company.
Size. GE has led the rest of the nation in market capitalization for a long time and is now battling with Microsoft for the top honors. With some 3.3 billion shares priced around $100 each, the firm weighs in at $330 billion. Whoomph. It employs more than a quarter of a million people and operates in more than 100 countries. In fiscal 1998, the company raked in $100 billion in revenues -- that's a tenth of a trillion. Jeepers. Earnings were $9.3 billion, more than the gross national product of Kenya in 1996. In fact, it's roughly the size of the combined 1996 GNP of Cambodia, Micronesia, Jamaica, Bhutan and Mozambique.
Is GE satisfied with its current size? Heck, no! It continues growing organically as well as by acquisition. In just 1998 alone, it spent $18 billion on 108 acquisitions.
Breadth. General Electric is kind of like a one-man band. Or a one-man orchestra, more accurately. Consider these varied business lines:
-- GE Aircraft Engines
-- GE Appliances
-- GE Capital Services
-- GE Industrial Services
-- GE Information Services
-- GE Lighting
-- GE Medical Systems
-- GE Plastics
-- GE Power Systems
-- GE Transportation Systems
-- NBC
It would take up too much room to describe each one, so just click here to read more.
Ambition. General Electric is already just about America's biggest and baddest company, but that's not enough. A few years ago it embarked on a "Six Sigma" quality-improvement program. In statistical terms, six sigma refers to a mere 3.4 defects or errors per million. Literally, GE is aiming for near-perfection. This program has been improving operating margins and saved the company about $1.2 billion in 1998.
Execution. The company seems to be firing on most, if not all cylinders. Look at these rising measures (and keep in mind that it's not easy for a behemoth to move so quickly):
operating net return return on
margins Margins on avg. invested
equity capital
1993: 11.3% 7.8% 17.5% 15.2%
1994: 13.6% 7.9% 18.1% 15.9%
1995: 14.4% 9.4% 23.5% 21.3%
1996: 14.8% 9.2% 24.0% 22.2%
1997: 15.7% 9.0% 25.0% 23.6%
1998: 16.7% 9.3% 25.7% 23.9%
Plus, take a look at the accolades it's received:
-- World's Most Admired Company - Fortune
-- World's Most Respected Co. - Financial Times
-- America's Greatest Wealth Creator - Fortune
-- 1st in Forbes World Super 50
-- 1st in Business Week 1000, Financial Times FT500
-- Most Respected CEO - Industry Week
-- 5th in Fortune 500. If ranked independently, nine of GE's businesses would be on the Fortune 500.
History and character. It's always nice to know where the company you own or are examining has come from. GE's ancestry goes back to 1892, when it was formed through a merger of Thomson-Houston and Edison General Electric. (Yes, that Edison. Thomas Edison himself was one of GE's first directors.) Current CEO Jack Welch has been at the helm for nearly two decades, establishing his place in GE history. (Click on his name -- that article is worth a read.) He's known for his toughness in business dealings, but there's a softer side of GE, too. GE Elfun, for example, is an organization of 38,000+ employees and retirees aiming to log a million volunteered hours of community service by the year 2000.
Little details. GE has been buying back its own shares, having committed to buy back $17 billion worth between 1994 and 1999. (These repurchases help boost the value of remaining shares. You can see this in action when you note how earnings per share have been growing more rapidly than overall earnings.)
Then there are dividends. The current annual dividend of $1.40 represents a fairly modest yield right now -- about 1.4%. But GE has increased its dividends every year since 1975, and they've grown around 12% per year in the last decade. Consider the effect of this over time. Let's say you buy 100 shares of GE at $100 per share, for $10,000. You collect $140 in dividends in the first year. Ten years later, if the dividend has grown to $4.34, you'll be collecting $435 in dividends on that $10,000 investment. In another ten years, if the dividend continues to grow at 12%, it'll be $13.50 per share, or $1,350 for you. See what's happened? By buying and holding, you're now rewarded with a 13.5% (and growing) annual dividend. Woo hoo! And that's totally ignoring any stock price appreciation.
Potential. Put aside for a moment all that GE isn't -- yet. The company still generates the majority of its revenues in the U.S. There appears to be continued opportunity for growth domestically, and even more opportunity abroad. As developing nations develop, they'll be in a position to buy more and more GE products and services. GE's Six Sigma initiative hasn't yet been fully realized. As quality improves even more, margins will rise with it. Management is highly skilled at maximizing profits and generating shareholder value.
If you could only hold one stock in your portfolio, this wouldn't be a bad one to own.