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Is GE Keeping Its Promises?

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As Fools know only too well, the current economic apocalypse -- which seems to worsen by the day -- began with housing, spread next to financials and the broader credit markets, and now is resulting in cutbacks by a steady stream of industrial corporations. In the latter category, DuPont (NYSE: DD  ) , Caterpillar (NYSE: CAT  ) , and Alcoa (NYSE: AA  ) , which is cutting 13% of its workforce, are among those pulling in their horns amid our sloppy economy.

However, if you had to pick one industrial bellwether that continues to garner more attention from the investing public than any of its mates, you'd probably give the nod to General Electric (NYSE: GE  ) . In many respects you'd be right. GE manufacturers everything from big compressors to jet engines to sophisticated medical diagnostic equipment and home appliances. But the company also falls into the finance category through its biggest unit, GE Capital Services, and it's in that arena that it's working hardest to shore up its circumstances.

To an extent, much of the focus that particular sector receives stems from the continuing shakiness of much of the financial world, but it also relates to the relative size of the capital unit. In the most recent quarter, GE Capital contributed about 37% of GE's total segment revenues, but saw its unit profits slide by 33%. In part as a result, last month management promised to take several "tough, but prudent" steps to strengthen -- and shrink -- GE Capital.

Sure enough, the company started off the New Year by appearing to be good for its word. This week alone, it's sold $730 million in receivables to Wells Fargo (NYSE: WFC  ) and shed some European consumer finance units to Spain's Banco Santander (NYSE: SAN  ) . It also sold $10 billion of FDIC-backed debt in the biggest such sale since the new government guarantee was launched in November.

So is GE becoming worth your investment shekels? Unfortunately, my response remains along the lines of "probably not yet." There's still no reason to believe that the finance unit is out of the woods completely, and, beyond that, recall my comments above about the plague that's spreading through the nation's industrial sector.

And while GE shares can be enticing, with their yield hovering around 7.5%, there are some rumblings that the $1.24 annual dividend and triple-A credit rating may not both be sustainable. A cut in either wouldn't be pretty for the company's shares in these market conditions.

GE carries a four-star rating by Motley Fool CAPS players. Why not add your vote to the mix?

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Fool contributor David Lee Smith doesn't own any of the shares listed above. He does, however, welcome your questions or comments. The Fool has a disclosure policy.  

Read/Post Comments (3) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2009, at 5:22 PM, TheRusty wrote:

    Let's see, GE is a bellweather for the US economy. But finance is bad so GE should shrink the size of its finance business and rely on the other sectors of the economy. But wait, now the other sectors of the economy are no good either?

    So David, let me see if I understand this article correctly. GE is keeping its promises, but we still should not buy the stock because the economy is bad. So what you're really advocating is that contrarian investing strategies are foolish and that we should wait to time the market and buy GE at the bottom? What website am I on?

    Whatever happened to "hey it looks like a good time to start buying on the bad news?" If the dividend gets cut, what would it get cut to? If GE loses AAA and cuts the dividend, what would be a good price to buy in at? $10? $8? When do we make the call that bad news is not going to happen? August? November? Now that would have been a great story.

  • Report this Comment On January 09, 2009, at 7:57 PM, Pilm wrote:

    "As Fools know only too well, the current economic apocalypse -- which seems to worsen by the day -- began with housing, spread next to financials and the broader credit markets, and now ..."

    FYI - the housing part of the problem didn't start in 2007/2008, it started in 2003 and continued to 2006. What started in 2007/2008 was the correction to that bubble. In 2003/2004 was the time when the gov't should have gotten involved to fix a run-a-way housing market, but unfortunately the banking committee was asleep at the wheel, as well as the FED. Kind of like a nuclear reactor with a small leak, if you don't fix it right away, you're gonna have big time problems later on. Welcome to "later on"!

  • Report this Comment On January 12, 2009, at 6:20 PM, TerryHogan wrote:

    I don't really get GE. I'm far from an accountant, but looking at their cash flows, it looks to me like they haven't had any positive cash flow for the past 8 years, other than that financed by more debt.

    Their last 10Q for example shows $28B in operating cash flow. -$52B from investments, and $24B from financing, which includes $99B from new debt.

    I know that people aren't buying this company if they're burning through Microsoft's market cap (or thereabouts) every quarter. Could someone with a little more accounting acumen explain this to me? Preferably on the GE discussion board.

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