General Electric Financial Research Report

GENERAL ELECTRIC FINANCIAL RESEARCH REPORT 12

GeneralElectric Financial Research Report

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GeneralElectric Financial Research Report

Thereare many ways to invest money, investing in a company is one of themost potentially profitable investments. Every investment has anelement of risk similar to investing in a corporation. Nevertheless,various benefits of investing in a corporation in the form of stocksor small and unestablished companies with stocks have not yet tradedpublicly exist. There are various reasons for investing in companies(Das, 2006).

Firstis to gain investment profit. It is the primary reason for investorsto invest in companies for their investments to grow. It involves thepurchase of stock. The stock gives the investor a chance to acquire aportion of ownership of the enterprise. The share price for theinvestor rises due to the demand. The investor gains from buying thestock at a lower price and selling at a higher price (Das, 2006).

Secondis income. After the investor purchases the stock, they are endowedto receive income in the form of dividends for each stock purchased.The income may be quarterly or annually and can be used to pay forliving expenses or fund other investments as they wait for the pricesof the shares to rise (Das, 2006).

Thirdis diversification. It refers to putting money into different typesof investments so that to reduce the risk and enhance the chances ofobtaining profit. For example, an investor can have investments insavings, certificate deposits and real estate. The investment in acompany is also a way to diversify income and reduce risks (Das,2006).

Fourthis control and support. The investment in a corporation gives theinvestor a level of control in the organization, and a means towardssupporting the company’s operations. An initial public offerinvolves a company that sells its shares to the public for the firsttime. The cash raised is used to support the company’s operations(Das, 2006).

Aninvestor’s investment in a small Company may help to keep itoperational during its hardest times. The investment allows theinvestor to fund a company they believe in and wait until it becomesprofitable. An investor needs to be aware of certain things beforeinvestments. They are required to carry out research and obtaininformation about the companies before making the decision to invest(Das, 2006).

First,they should know the price of the entire company. It is advisable forinvestors to have an interest to more than the current price of theshare and focus on the full price of the enterprise. The cost ofacquiring the whole company is called market capitalization (Das,2006). It is obtained by multiplying the quoted price with the numberof all outstanding common shares of the company. For example, acompany that have a million shares that are outstanding and a quotedshare price of 50 dollars per share have a market capitalization of50 million dollars. The market capitalization helps investors toavoid overpaying for a stock (Das, 2006).

Second,the investor needs to establish whether the company is buying backits shares. The important fact behind buying shares is that per sharegrowth is more important than the overall corporate growth. A companycan manage to post the same profit, sales revenue for six consecutiveyears. The company is considered to increase the returns to investorsby reducing the number of shares that are outstanding. For example,the investor can view the investment as a pizza. Each slice of thepizza represents a share of the company. The investor will have alarger slice when there are fewer investors compared to manyshareholders (Das, 2006).

Third,the investor should identify their reasons for investing in thecompany. They need to identify their key interest in the businessthey want to invest. It is dangerous to ‘fall in love’ with thecompany and buy its shares because the investors feel fondly for theemployees.

Afterall, an investment the best company in the world is a lousyinvestment if the investor ends up paying too much for the shares.The investor should obtain the fundamentals of the business such asthe current selling price, profits, and good management as theirprimary reason to invest. The involvement of emotions leads theinvestor into speculating as opposed to intelligent investing.Investors select the companies to invest in by eliminating theirfeelings and making selections based on the hard cold information. Toobtain the information requires patience and the investor’swillingness to depart from the expected losses on the stock if it isnot fairly priced or it is undervalued (Hatten, 2001)

Finally,before buying the company’s shares, investors should ask themselveswhether they are willing to have the stock for the next ten years. Ifan investor is not willing to buy and forget about the shares for tenyears, they should not invest at all. This is evident on Wall Street.On a day-to-day basis, the professional managers attempt to beat theDow Jones industrial average. It is a collection of 30 greatlyunmanaged stocks. It is recorded that year after year they fail tobeat the average. It has been impossible for a portfolio managed bythe best minds in finance to beat the unmanaged portfolio oflong-term stocks that are held indefinitely. However, there has beena guaranteed way to success that involves selecting an exceptionalcompany and paying as little as an investor can for the initialstake. The investor then begins a dollar-cost averaging program,reinvests the dividends and leaves the position alone for severalyears to grow (Das, 2006).

Asa financial manager, I choose the General Electric Company aconglomerate organization that was incorporated in New York. It isheadquartered in Fair-field, Connecticut. Currently in 2015, thecompany operates through various segments such as Oil and Gas, Energymanagement, healthcare, transportation, banking power and water(Evans, 2006)

Inthe year 2011, Fortune 500 ranked the company as the 26th largestcorporation in the world in terms of gross sales. I addition, it isranked as the fourth-largest company in the world among the ForbesGlobal 2000.In other rankings, it is listed as number 7 company forleaders by Fortune 500, number 5 best global brand by Interbrand andnumber 63 green company by Newsweek. In addition, Fortune 500 andfinally as number 19 most innovative corporations also rank it as the15th most admired company by the Fast Company (Evans, 2006). It’shistory dates back from the invention of the first practicalincandescent light bulb to the construction of America’s firstcentral power station. The company has a tradition of life-changinginnovations. General Electric has provided the basis for the modernlife with power and light. It has redefined everything from thelength of the day to the knowledge of human bodies through thedevelopment of the X-Ray machine (Evans, 2006).

Thehistory of the Company dates back to Thomas Edison. He had a broadinterest in many electricity related Companies such as the EdisonLamp Company which was a lamp manufacturer in the East Newark,Bergman and Company which manufactured electric light fixtures,electric lighting devices and sockets and the Edison machine workswhich was a manufacturer of dynamos and massive electrical motors.His financial arm was backed by the Vanderbilt family and JP Morgan,who helped by funding Edison’s research. There was a merger betweenDrexel, Morgan and Company that assisted in merging all the Edison’scompanies into The General Electric Company that that wasincorporated in New York on April 4, 1889. Edison and Thomson-HoustonElectric Company that was owned by Charles Coffin established GeneralElectric in 1892 through a merger of Edison General Electric Company.He had acquired many competitors to the extent of gaining access toessential patents. After the merger, the two companies continue toconduct operations under the GE banner till date (Evans, 2006)..

GeneralElectric was incorporated in New York, and the schenedary plant wasused as the headquarters for many years afterwards. By the year 1896,the company was amongst the original 12 corporations that were listedon the newly-formed Dow Jones industrial average.

Twocenturies later, after 118 years, it is the only company that isstill listed on the index. In 1919, the company ventured into radiosales until 1930. In 1927, the company ventured into televisionmanufacture and sale. Power generation began in 1941. Their historywith turbines gave the corporation the know how to venture into thefield of aircrafts. It produced its first superchargers during theera of World War 1. However, they became indispensable in the yearsbefore the World War 2.The Corporation was the world leader inexhaust driven superchargers when the battle began. Furtherexperience made the company generate the Whittle w.1 jet engine. Theaviation experiences made the company emerge as the world’s largestmanufacturers of engines. It is second to Rolls-Royce Corporation ofBritain. Today, the company has seven business divisions that includeGE power and water, oil and gas, energy management, aviation,healthcare, transportation and capital (Evans, 2006).

Therationale for this choice is based on various considerations. First,the company has minimized risks through diversification to become aconglomerate. It is composed of seemingly unrelated businesses. Thecompany owns a great number of smaller companies, which conductbusiness separately. The General Electric Company means differentthings to various investors. For some investors, it has big bets onenergy and for others, is the unique culture of the innovation. Thereare investors who prefer a healthy dividend payout by the companythat has been maintained for over 100 years. The company manages toprovide for each type of shareholder. It is notable that theenterprise has also bent backwards for the dividend enthusiasts eversince the recent economic meltdown (Evans, 2006).

Ashe was presenting the company`s financial reports for the year 2012,the Chief Executive Officer Jeff Immelt stated that the enterpriseputs efforts to make the investors view it as a safe long-terminvestment. Further, he mentioned about the company’s extra effortsto offer high dividends. He pointed out that the company’s means ofcash allocation gives high priority to growing the profits. Thedividend comes first. First, the management shows money to theshareholders. The investor should feel optimistic about the dividendpayout by the company from the statement by the Chief ExecutiveOfficer. It indicates clarity of the dividends by the enterprise.Further, it shows that the enterprise has a disciplined cashmanagement approach as evidence may show. Between the year 2010 and2013, the dividend per share of the company grew from 0.45 to 0.79per share. This was an increase of 72%. The current projecteddividend yield is 3.5% compared to the industry that has an averageof 2.2%. The total cash that was given back to the investors jumpedby 176% from 6.6 billion to 18.2 billion between the year 2010 and2013. The figure includes share buybacks and the dividends that werepaid. Further, the company’s dividend is above the rate ofinflation. The growth is at 20% compared to an inflation rate of2%.Second, the company’s dividends are not breaking the bank.Investors would like to see a substantial rate of growth in theprofits but most important is the level to which growth is sustained.

Thebest way to measure the affordability of General Electric’sdividend is by checking the dividends pay out as a certain percent ofits revenue. At the end of 2013, the company’s payout represented54% of free cash flow for each share. It was well below the preferredtop of 65%. The payout ratio stood at 62% of the total earnings forthe year 2013. The company has so far played its cards in aconservative manner after the financial crisis. It has been able tofortify its balance sheet and accelerate its revenues. As a result,no investor can doubt the payout ratio at its current trajectory(Hatten, 2001).

Further,it is important to note that General Electric is the second richestcompany in the United States of America in terms of cash on hand. Itsmajor competitor in 2013 was Bank of America that topped theCompany’s cash balance of 88.7 billion. Finally, the GeneralElectric‘s strategy is sound. It is growing and sustainabledividend is supported by competitive simultaneous business (Evans,2006).

Inaddition, the Company has a durable competitive advantage or aneconomic moat. It is built on four main pillars that include a sturdybrand, economies of scale, the network effect and expensive switchingcosts. It is not arguable that the company does not have a thumb ineach of the categories. The company’s brand is ranked as the sixthmost valuable in the world according to the famous Interbrand report(Evans, 2006).

Interms of economies of scale, the Company has a large sizedifferentiator, which was obtained during Jack Welch’s leadership.The Company’s future profits are pegged on the network effects andthe high hurdles caused by switching costs. It offers a follow up onmaintenance services for its equipment around the world. It also hasobtained significant bets on predictive tools such as the industrialinternet (Evans, 2006).

Dueto the many places that the Company operates in, its customers suchas oil companies and airlines rely on its services whenever somethinggoes wrong. Further, the Company has a huge edge in manufacturing. Itis a strategy to distance itself from the old days of banking. It ishence not too late for the investor to jump into the train of thecompany’s dividend. The company shall facilitate the investorscrave for stability through its steady payouts. A pile of cash andhigh business backs the payouts (Evans, 2006).

The corporation’s ratios for three past years are as follows:

Ratio

years

2014

2013

2012

Current ratio

2.47

2.86

2.96

Quick ratio

3.42

2.42

2.26

Earnings per share

1.51

1.3

1.31

Price earnings ratio

17.17

19.59

17.57

Theinvestor’s strategy involves studying the movement of the shares toestablish whether it is on a rise or a falling trend. Afteridentifying the lowest and the highest points, the investor waits forthe share to reach its bottom so that they can buy. The investor’speriod of holding the shares depends on whether they intend to makeshort-term or long-term profits. For short term profits, the investorwaits until the stock hits its peak to sell. For an investor withlong-term interests in the company, they hold the shares and benefitfrom the annual or quarterly dividends paid by the enterprise. Aftera period of several years, they sell the shares to make a ‘kill’.Meanwhile, as they keep hold of the shares, they keep on adding totheir portfolios by reinvesting the shares back to the company (HenryFord, 2010).

Secondis the ability to rebalance. Long-term investors try to manage risksby periodically selling their shares. The buying and selling ensurethat the investor’s benefits from periodical profits as they waitfurther movements on the shares. In addition, if the investor has aportfolio that contains assets and shares, they have the options tosell the asset that has a high composition of the portfolio. Forexample, the investor can sell shares and buy other assets such asland and buildings. Similarly, the investor, after accumulating asubstantial amount of assets, they can sell them off to buy theshares once they hit their bottoms (Henry Ford, 2010).

Thirdis position sizing. This strategy aims at defending the shareholderby limiting the amount of exposure. If the shares seem riskier thanother assets, the investor can choose not to invest or just invest asmall quantity of capital.

Thestrategy is used to obtain some exposure of the riskier sectors likebiotechnology. A loss of 50% on 2,000 will tend to hurt less comparedto an enormous capital such as 200,000. However, the easiest way toreduce the risk in the shares market is always by converting theinvestments into cash (Henry Ford, 2010).

Fourthare the stop loss orders. The investor can place a stop loss orderwith a broker. The stop loss indicates how much the investor iswilling to lose in a given trade. The agent keeps following on theaccumulating losses until when they reach the stop-loss cap uponwhich they exit from the trade. This is an effective way as it keepsthe investor at peace. It allows the investor to appreciate the factthat there are possible losses. Further, it enables the investor toaccept the results whether good or bad (Henry Ford, 2010).

Fifthis diversification. In the shared world, there will always be a stockprice variations emanating from the changes of demand and supply. Awise investor does not put all the capital in one stock unless theyare quite sure that the prices shall rise. It is reasonably importantto take caution while investing. The investor should observe thetrends assumed by various shares or assets. The best choice for aportfolio is the one where as one share goes up, the others sharesprice either goes up or drops. As a result, the losses from pricedecline in one share are counteracted by the price rise in the othershare. The best option involves acquiring shares whose prices movedirectly opposite each other such that when one is at its bottom, theother is at its peaks. The investor is left at the middle position ofboth the loss and gains (Hatten, 2001).

Finally,it is necessary to research heavily on a company before investing inthe shares. A wise investor does not put all their capital in oneinvestment. It is advisable to obtain a portfolio composed of otherassets as a defense to the unknown future price movement of thevarious investments. The world of shares is always risky, it iscomprised of steadfast movement in prices but a well thought outstrategy can prevent the investor from the various exposures (HenryFord, 2010).

References

Bridwell,N. (2012).&nbspCliffordshares.New York, N.Y.: Scholastic

Das,S., &amp Das, S. (2006).&nbspRiskmanagement&nbsp(3rded.). Singapore: John Wiley &amp Sons.

Evans,T. (2006).&nbspTheeducation of Ronald Reagan the General Electric years and the untoldstory of his conversion to conservatism.New York: Columbia University Press

Hatten,K., &amp Rosenthal, S. (2001).&nbspReachingfor the knowledge edge how the knowing corporation seeks, shares &ampuses knowledge for strategic advantage.New York: AMACOM.

O,B. (2010).&nbspRiskmanagement.New York: Nova Science.