Here's Why General Electric Company Deserves Its Place on the Dow

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) has been America's most-watched market index for decades, despite -- or perhaps because -- its narrow focus on a mere 30 stocks. Where other indices might track 500, or 2,000, or even 5,000 different stocks, the Dow's steady focus on 30 business bellwethers has made it both easier to understand and easier to dismiss as a relic of simpler times. But as long as the Dow remains front and center in every day-to-day market analysis, it and its component companies will remain the most important barometers of American markets.

Source: Wikimedia Commons.

That's why it's important to understand not only the Dow, but its components as well. What do they do? What do they represent on the Dow, and why do they matter to the American economy? Where have they come from and where might they head in the future? Today we'll dig into the details of General Electric  (NYSE: GE  ) to find answers to these questions and more, so that we can understand not just what moves the Dow, but why.

General Electric at a glance

  • Founded: April 15, 1892.
  • Joined the Dow: Nov. 7, 1907 (it's the Dow's longest-tenured component).
  • Current Dow weighting: 1% (29th of 30 components).
  • Replaced: Tennessee Coal, Iron and Railroad (bought by U.S. Steel in the Panic of 1907).
  • Also a Dow component from: 1896 to 1898 and 1899 to 1901.
  • Sector represented: Industrial (conglomerates and manufacturing).
  • Rank (by revenue) among all stocks:
    • o 6th (Fortune 500, all companies)
    • o 7th (Forbes Global 2000, all companies)
    • o 22nd (among all federal government contractors)
    • o 6th (Interbrand's Best Global Brands, 2013)

General Electric has a long history of being hard to pin down. It makes everything from jet engines to hospital scanners, and it supports these diverse business lines with one of the largest financial operations in the United States (although it plans to spin off this subsidiary in the near future). GE is inextricably linked to the Dow, as it was one of the index's founding members in 1896, and since its reinstatement in 1907 has become the longest-tenured stock on the world's most-watched index.

GE is most closely identified with electricity -- "Electric" is half of its company name, after all -- but it has become just as dependent on supporting things that fly or dig into the ground, as its aviation and oil and gas segments last year were the second- and fourth-largest nonfinancial segments in the company behind its turbine-centric power and water unit. Sandwiched between jet engines and oil wells was GE's monster health-care segment which, at over $18 billion in 2013 revenue, dwarfs most companies that do nothing but serve the health-care industry. No one segment comprised more than a quarter of GE's total industrial-sourced revenue last year, which will be enormously helpful for the company as it works to grow its diverse business lines in a rapidly changing world.

General Electric by the numbers

GE Chart

GE data by YCharts.

  • Ten-year share price growth: (16.5%)
  • Ten-year dividend growth: 10%
  • Total return (with dividends reinvested): 17.5%
  • Average P/E over the past decade: 17.5
  • Current P/E premium over average P/E: 25%

GE Revenue (TTM) Chart

GE Revenue (TTM) data by YCharts.

  • Annualized revenue growth (past five years): (3.2%)
  • Annualized EPS growth (past five years): (1%)
  • Annualized free cash flow growth (past five years): (7.8%)
  • Change in profit margins (past five years): 8.9%

The financial crisis was rough on virtually every company in America, but few have had as much difficulty adapting to a post-crisis world as General Electric. While it has nearly held the line on earnings by boosting its profit margin over the last five years, GE has nonetheless suffered an ongoing decline in most key metrics that hasn't been seen on other Dow components' financial statements. Still, it remains one of America's largest companies, and is without a doubt one of the country's most important manufacturers, so there is no clear successor to GE's spot on the Dow for the foreseeable future.

Despite GE's struggles, it remains incredibly profitable and incredibly well funded -- so long as its financial-services subsidiary remains liquid -- with over $100 billion in profit sloshing about in international accounts. That amount has grown by $8 billion since 2011, equaling roughly 30% of GE's total reported profit since that time.

Drawing down its financial arm, which was backstopped to the tune of $139 billion in FDIC guarantees during the financial crisis, will reduce GE's risk of implosion in any subsequent crisis, but will also crimp its long-term ability to generate outsize profits in boom times. A shift back toward its core manufacturing segments has thus far produced strong growth to offset GE Capital's decline -- since 2009, industrial revenue has risen 17%, while GE Capital's revenue is down by 14% -- paced by a 75% surge in revenue in GE's oil and gas segment over the last five years. As GE Capital stabilizes, this strategy should result in a return to growth in the overall business. Wall Street analysts have pegged GE to an 8.5% annual earnings-per-share growth rate over the next half-decade.

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