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Better Buy: General Electric vs. General Motors

By Reuben Gregg Brewer - Updated Feb 10, 2020 at 8:25AM

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Two U.S. icons that are facing headwinds. Which one, if either, would be a good addition to your portfolio?

General Electric (GE -0.56%) has been in the news the last few years, but normally not for good reasons. General Motors (GM -2.90%) has made headlines lately as well, but again not for great reasons. Looking at these two U.S. industrial and manufacturing icons, is there one that stands out as a buy?

Near-term considerations

General Motors makes cars on a global scale, with the U.S. and China being two of its most important markets. The U.S. auto division was hit with a strike that put a temporary damper on earnings, but that's now resolved. The Chinese auto sector, however, has been relatively weak for some time, and the coronavirus should keep it that way for longer. Fourth-quarter 2019 sales in China were down a massive 13.3%. Put simply, 2019 ended on a bad note -- revenue and earnings were both down for the year -- and because of the health issues China is dealing with, 2020 is likely to start off poorly as well. That remains true even if the U.S. market picks up, since China is very important for GM. 

Two hands holding blocks spelling out the words RISK and REWARD

Image source: Getty Images

General Electric, meanwhile, posted earnings that impressed Wall Street in the final stanza of 2019. Results showed that the long-troubled industrial giant may actually be making some headway in its turnaround effort. The biggest positive from the quarter was that cash flow came in better than expected. In the background, the outlook for the balance sheet is also improving as asset sales help to increase GE's financial strength. In fact, compared to the last few years, 2020 could actually look pretty good for the company.

From this big-picture perspective, GE clearly has an edge here.

Long-term thoughts

General Electric, however, still has a lot of heavy lifting to do before its turnaround can be called a success. Most notable is that two of its four divisions are producing middling results at best. Yes, its healthcare and aviation-focused businesses are great, with margins in the 20% area. Its power and renewable energy divisions, however, are both still bleeding cash and posting uninspiring margins. These two businesses account for around 40% of GE's revenue.

Basically, even though GE is on the mend, it still has notable work to do. In addition to that, it is still dealing with troubles within its financial arm (including around $40 billion in insurance liabilities) and an SEC investigation into its accounting practices. Basically, there remain many headwinds to deal with at GE, both within its core operations and outside of them. 

General Motors, meanwhile, has been working to get ahead of the next industry downturn. It has been cutting costs, and the big win for the company coming out of the worker strike was that it will be able to close more plants. That will help make GM even more efficient at what it does. When the auto sector does start to turn lower, GM should be well positioned to handle the blow. China is a wildcard because of the coronavirus, but the automaker should be able to weather the hit. And when the cyclical industry picks back up again, an increasingly lean GM will be ready to reap the benefits. 

General Motors appears to be in a better position than GE when you look out toward the longer-term future right now.

Getting paid to stick around

For dividend-focused investors, GM's roughly 4.5% yield will be an easy winner over GE's 0.3% dividend yield. Don't get too excited by that, however, because neither company has a particularly great record when it comes to dividends. GM, which took a turn through bankruptcy court not too long ago, only restarted its dividend in 2014, and hasn't raised it since 2016. It isn't clear yet if that payout will survive the next industry downturn. 

Of course, that's still much better than GE, which has cut its dividend several times in its turnaround effort. Today it is just a token $0.04 per share per year so institutional investors with a dividend mandate can still own the stock. Few individual investors with a dividend bent would find the stock interesting.

So GM does pay investors a fat dividend today, but the dividend shouldn't be seen as a slam dunk win here. 

If you had to pick

If the only two choices you had to select from were GE and GM, then it seems that General Motors is better positioned for the long term. It has basically been preparing during the good years for the inevitable bad years, and that should serve investors well. Sure, after a massive price decline, GE probably has huge recovery potential, but it still comes with a notable amount of uncertainty -- two core divisions that aren't performing particularly well, a still troubled finance division, and an SEC investigation. All but the most aggressive investors would likely be better off waiting until there is more proof that GE has its house in order.

Luckily, though, these aren't the only companies that investors have to choose from. And, in the end, there are likely to be better options for investors than GM and GE. Most should probably take a pass on both of these U.S. icons at this point. 

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Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$74.63 (-0.56%) $0.42
General Motors Company Stock Quote
General Motors Company
$37.10 (-2.90%) $-1.11

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