A Leap of Faith: General Electric

This article is part of our Leap of Faith series, in which Foolish writers each pick a stock to take a chance on for the long term.

Nearly 10 years ago, I took a leap of faith by buying General Electric (NYSE: GE  ) shares as my first individual stock pick in my IRA. Today, in honor of Leap Day, I'm renewing that leap of faith and explaining why I think General Electric is still worth holding for the long haul.

Yes, it was damaged by the recent financial meltdown, lost its coveted AAA debt rating, and slashed its dividend during that disastrous period of time. But what it has done for itself and its shareholders since then has convinced me that it's a business worth continuing to own.

A real money recovery
Key to my belief that General Electric has enough staying power to be worth continuing to own is the recovery in its dividend since it emerged from the financial disaster. Yes, its dividend still has a long way to go before it recovers to its former heights, but as the chart below shows, it is certainly moving in the right direction:

Source: Yahoo! Finance.

Contrast General Electric's recovering dividend with pure financial companies Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) . Those financial titans slashed their dividends during the crisis and are still paying a mere penny per share per quarter. General Electric certainly deserved to be berated for letting itself get sucked into the subprime mortgage mess. Still, that GE has been able to begin to recover much more quickly than those banks is a testament to the benefits of its more diversified revenue streams.

A company's dividend is usually a critical signal from its leadership on the overall health of its business, and the fact that General Electric's has been recovering speaks volumes for the company's fundamental strength.

Strength from within
While it's true that General Electric's debt is no longer "AAA" worthy, it does still sport a "AA+" debt rating, just one notch below that rarefied level. That's still an extremely secure level, one shared with Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) -- a company that actually helped bail out GE during the depths of the crisis.

That slightly lowered debt rating does mean it takes a somewhat larger leap of faith to see GE as being worthy of holding for the long haul. But still, getting downgraded to being at a level on par with Buffett? That's hardly a risk worth worrying about. If anything, you might actually make the case that the downgrade helped General Electric by providing a very tangible reminder that it, too, is fallible.

Focused on the future
On top of its solid balance sheet and reinvigorated dividends is a very strong, future-oriented strategy. Whether nuclear, natural gas, solar, wind (or "all of the above") will be key to the world's future energy needs, General Electric's power generation systems are poised to lead. And as energy efficiency remains at least as important as new generation, its Ecomagination initiative provides a strong foundation there, for business lines ranging from light bulbs to locomotives.

There's no question about it -- General Electric's business is focused on the future. That focus provides a strong reason to believe the company will not only survive -- but also thrive -- for a long time to come.

All told -- a leap of faith worth taking
Shareholder-friendly dividends. World-class balance sheet strength. A focus on the future that will keep it relevant for a long time to come. Yes, it's always a leap of faith to buy a stock with the intention of holding it for the long run. But when it comes to General Electric, it's a leap with a very strong tailwind supporting it. I've taken the leap myself, and I see no need to turn back now.

See what other stocks are getting our Foolish writers to swing for the fences; click back to the series intro for links to the entire series.

At the time of publication, Fool contributor Chuck Saletta owned shares of General Electric and Bank of America. Click here to see his holdings and a short bio.

The Motley Fool owns shares of Berkshire Hathaway, Citigroup, and Bank of America. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 01, 2012, at 1:15 PM, Tuxster12345 wrote:

    Hi,

    With GE having hundreds and hundreds of billions of dollars of debt on its balance sheet, versus its total cash, what is your rationale for saying the company has a "strong" balance sheet?

  • Report this Comment On March 01, 2012, at 10:15 PM, TMFBigFrog wrote:

    Hi Tuxster12345 --

    Great question -- GE is a hybrid company, part industrial and part financial. Financial companies tend to be very heavily leveraged, but compared to say Goldman Sachs, GE has more equity backing up each dollar of debt.

    Hope this helps.

    -Chuck

    Disclosure: I own GE shares.

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