In the 20th Century, GE was a steadily performing industrial icon, but now in the 21st Century, it's gone into the tank, and shareholders who stayed the course have paid the price. But when the stock market gives you lemons, make Foolish lemonade: Brokamp explains five things that the company and its decline can teach us -- or remind us -- as investors.
A full transcript follows the video.
This video was recorded on May 8, 2018.
Alison Southwick: So, Bro, what's up?
Robert Brokamp: Well, Alison, in theory you'd think that General Electric would make for a solid, long-term investment. Co-founded by none other than Thomas Edison, the company has been around since 1892. For decades it has been one of the biggest, most diversified companies in the world. It paid a steady dividend. We've all used the company's products and services, and [perhaps] on a daily basis.
But so far, this century, the reality of GE is that it has been a horrible investment. After reaching almost $60 per share in 2000 on a split-adjusted basis, it now trades for $14. What are the lessons for investors, workers, and retirees alike? Well, I have five.
Lesson No. 1: Even blue chips get the blues. Back in the early 1920s, according to Wall Street lore, a Dow Jones employee named Oliver Gingold was standing next to a stock ticker machine in a brokerage that would eventually become known as Merrill Lynch, and he saw a few stocks trading for more than $200 a share. They moved higher, so he reportedly turned to the person standing next to him and said he had to get back to his office to "write about these blue-chip stocks."
Thus, an investment seal of approval was born. The term "blue chip" was originally applied to stocks with high prices, because blue chips are worth more than red and white chips...
Southwick: Oh! From gambling.
Brokamp: Yes. But, they have since come to be thought of as reliable, steady stocks. In fact, according to Merriam-Webster, the current definition of a blue chip is "a stock issue of high investment quality that usually pertains to a substantial well-established company and enjoys public confidence in its worth and stability."
Ah! Where can you find such stocks? Well, you look at the index -- the only index -- that has the term "blue chip" in its official description, and that is the Dow Jones Industrial Average. GE was among the 12 original companies listed on the Dow [which was created in 1896] and it's the only original member of the Dow [index].
But despite such a blue-chip pedigree, GE hasn't been a model of stability or reliability over the past 18 years. The lesson, here, is no stock is a sure-fire moneymaker, despite being called a blue chip.
Lesson No. 2: Holding for the long term is no guarantee of success. It was early 1996 when GE stock first exceeded $14 a share on a split-adjusted basis. Here we are, 22 years later, and the stock is still at $14 a share. That's a holding period of more than two decades with no growth.
Our standard Foolish advice is to keep money that you need in the next three to five years out of the stock market, because generally that's how long it takes for the stock market to recover from a bear market, but an individual stock is a very different thing. As the history of GE illustrates, even a time frame of well more than a decade [two decades!] is not a guarantee that you're going to make money.
Lesson No. 3: Past dividends are not necessarily indicative of future results. Like many companies during the Great Depression, GE cut its dividend, but the payouts weren't reduced again for decades [not until 2009 in the Great Recession]. In those intervening 80 or so years, investors might have understandably thought, "Well, a dividend from GE is like death and taxes. It's a sure thing." The reality is that no dividend is guaranteed and unfortunately for GE shareholders, they cut the dividend again last December.
It can be tempting to believe that something that happened for decades will continue into the future, but the creative evolution of capitalism ensures that no investor can rest on a company's past laurels.
Lesson No. 4: A diversified company isn't a substitute for a diversified portfolio. There are very few companies that have been in as many businesses in as many countries [currently 130, to be exact] as GE has. You think of appliances, electronics, aviation, healthcare, transportation, sciences, entertainment, plastics, and of course light bulbs. Some sort of GE business or service has touched the lives of millions and perhaps billions of people.
But its multiple businesses in multiple countries didn't prevent the stock from being a dud of an investment, and unfortunately this is a lesson painfully learned by many former GE employees. According to a recent Wall Street Journal article, they thought they were in a fine position to retire given that they were getting a pension from GE as well as a heaping helping of company stock. Because they had a stock purchase program you could buy it at a discount.
In one case, they profiled someone who retired in 2016 with $300,000 worth of company stock, but because the company has lost more than half its value in less than two years, this particular retiree is now looking at having to go back to work.
The bottom line, of course, is don't invest more than 5-10% of your portfolio in one stock, regardless of the size and the reach of the company.
Lesson No. 5: Our last lesson is to have a plan B. Over the past several months, GE has announced plans to cut thousands of jobs and reduce its corporate staff by 25%.
Southwick: Wow! That is substantial!
Brokamp: Substantial. So, if you're still working, your financial future will be determined by two things: your human capital [that is, your ability to earn a paycheck], as well as your investment capital. And most people can't count on staying with the same company, [as Oliver Gingold did , the coiner of the term "blue chip"]. He began at Dow Jones in 1900 at the age of 15 and he worked there until he died in 1966. So, he had a 66-year career with Dow Jones. Most of us can't rely on that.
The lesson, here, is just as your portfolio should be diversified, so should your human capital. Regularly develop your skills, your network, and your backup plan for what you'll do if your employer no longer needs or can afford your services.