Before the year 2000, the diversified blue chip General Electric (NYSE: GE ) closely mirrored and frequently outperformed the S&P 500 (SNPINDEX: ^GSPC ) index. With its fingers in a variety of different pies -- from manufacturing to transportation to energy -- GE looked like a slice of the broader American economy.
Not so much over the past decade. In the past one-, five-, and 10-year spans, GE has underperformed the S&P by 11%, 77%, and 82%, respectively. The two are no longer in lockstep, and the gap appears to be widening. At this point, should long-term investors (myself included) stay along for the ride? Here are few reasons to stay bullish on this industrial giant.
A huge, growing backlog
GE's tremendous comeback since the depths of the recession has been bolstered by the American economy. While any drastic measures taken in Washington, D.C., could curb our recovery, GE can take comfort in the fact that a deep backlog of orders will fuel near-term growth.
In the second quarter, orders in the U.S. grew by 20% year over year, indicating that customers are willing to open their pocketbooks even in a volatile economic climate. This pushed GE's total worldwide backlog to $223 billion, continuing a healthy average growth rate of 6% per year since 2009.
Driven largely by its energy portfolio, GE's backlog provides a glimpse into future revenue for the company. As the company leans more heavily on industrial businesses -- while GE Capital takes a backseat -- it is promising to see solid growth in the last quarter, when four of the seven segments posted 10% year-over-year gains.
A cash war chest like no other
According to a recent study by Bloomberg, nine out of 10 of the richest American companies are banks or financial institutions. The only one that broke the mold? General Electric.
GE's massive pile of cash, which stands at $88.7 billion, puts it in second place, just behind Bank of America. No other industrial-type companies even cracked the top 20, although many of the top guns could be considered competitors in one way or another.
Still, it's not the amount of dry powder that matters, it's how a company is able to use it. And that's where things get interesting for GE. The company has such deep pockets that its leadership can make bold, long-term bets few competitors can match. CEO Jeff Immelt frequently discusses these relatively slow-burning initiatives, many of which might have long payback periods but also large returns on investment.
Just last week, GE announced 14 more products related to its "Industrial Internet" initiative, which aims to make machines smarter. Also called the "Internet of things," this project will allow GE to link equipment, locomotives, or engines with sensors to monitor performance and analyze big streams of data. The savings for the company -- and for clients -- could be tremendous.
Immelt often talks about the "power of 1%" improved efficiency, which could hypothetically save an airline $90 million in fuel costs over five years. GE's recent report estimates this "Internet of things" will boost GDP by $10 trillion-$15 trillion over the next 20 years.
GE's innovation in manufacturing doesn't end with smarter machines. As my colleague Blake Bos recently pointed out, GE is set to make history in 3-D printing as it introduces new jet engine fuel nozzles on an unprecedented scale.
For these projects to take shape, GE's deep pockets and ability to scale really matter. Scale will also be critical in reaching a tipping point where GE's solar and wind energy can compete with fossil fuels in regions around the world.
For GE, this isn't a new story -- it's always been about scale. For shareholders, what will be most interesting is the company's unique ability to push old-school industries into the digital age.
A rock-solid dividend
Despite holding a massive pile of cash, GE finds ways to redistribute that wealth to shareholders. In 2011 and 2012, the company paid out $11.9 billion and $12.3 billion through dividends and stock repurchases, which compares with cash flow from operations of $33.4 billion and $31.3 billion in each respective year.
While management is intent on deploying cash to the most promising projects, shareholders appear to be an equally important priority. As a result, GE's dividend yield stacks up nicely against its peers in the industrials category.
GE's dividend looks impressive, especially relative to its closest competitor, Siemens (NYSE: SI ) . On a price-to-cash-flow basis, GE also trades at a relative discount to Siemens at 8.8 versus 10.7 for the German conglomerate. GE's ability to distance itself more effectively from the underperforming European economy has provided stability in a market that's cramped Siemens's growth prospects.
GE's been far from a stock market darling over the last decade, but the company's portfolio appears in better shape now than at any point over that time frame. Its finance arm, which derailed the company in 2008, has been right-sized, and management is hyperfocused on segments that build real, tangible products. In the years ahead, GE's return to its innovative roots could produce some really impressive returns for shareholders.
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