Here's Why Investors Are Paying More for General Electric Company's Cash Flow Nowadays

General Electric is moving away from risky banking operations and closer to its industrial core -- and investors love the makeover.

Apr 30, 2014 at 2:00PM

Four years ago, investors were only willing to pay 7.1 times trailing free cash flow for a share of General Electric (NYSE:GE). Today, the price-to-free cash flow ratio is a kingly 17.6. Without this impressive ratio expansion, GE shares would not have been able to keep up with the company's fellow Dow Jones Industrial Average (DJINDICES:^DJI) members.

What's going on with GE's cash flow, and why are investors willing to pay a much larger premium?

GE Chart

GE data by YCharts.

First, you should know that General Electric isn't just an industrial powerhouse. Owning GE shares is also much like investing in a very large bank. GE Capital accounted for 30% of the conglomerate's total revenue last year, or roughly $44 billion. The financial arm provided $115 billion of loan capital to companies, municipalities, and infrastructure projects, and another $105 billion to American consumers.

Compare this to fellow Dow member JPMorgan Chase (NYSE:JPM), whose commercial banking division recorded $7 billion in 2013 revenue on $137 billion in total loans under management. JPMorgan's consumer segment holds $289 billion in total consumer credit, excluding credit card balances.

Any way you slice it, GE plays in the same league as JPMorgan Chase. In some ways, it's a more efficient banker than the traditional too-big-to-fail money center bank.

As such, GE took a bank-sized hit from the 2008 financial crash. On top of that, the company's industrial operations also suffered from the lack of life-giving capital in the global market. With these factors in mind, it's no big surprise that GE took that disaster harder than most companies -- and stocks. General Electric investors even envied JPMorgan shareholders for a while.

GE Chart

GE data by YCharts.

In recent years, General Electric has undertaken a massive makeover. The company is selling off noncore operations bit by bit, including several banking operations abroad. The NBC Universal media operation is long gone, replaced by a bevy of profitable aviation and oil-field services acquisitions.

Investors who want a bank can still buy something like JPMorgan. But there are few alternatives to GE as a global giant of heavy industry. And these days, the company is showing a real commitment to what it does best, moving away from nonessential distractions and risky banking.

Long story short, General Electric is emerging as a new kind of company. Heavy investments today are building a stronger cash machine for the long run, and that's why GE shareholders are prepared to pay a bit more for each dollar of today's cash flow.

The new GE is a leaner, meaner, and more focused giant than the old one. This long-term cash generator is simply worth a bigger premium nowadays.

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Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of General Electric and JPMorgan Chase. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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