Even people who don't follow the stock market know the names General Electric (GE -2.11%) and 3M (MMM -1.05%), which speaks to the iconic nature of these two industrial giants.
But just knowing a company's name isn't enough reason to buy its stock. When you dig into the financial stories of these two companies, one stands out as a better investment option than the other.
GE: Still getting back on track
General Electric's stock is down about 65% over the last five years. Shares are currently trading at roughly the same level as they did during the deep 2008-09 Great Recession. That's an important comparison period because it marks the start of a massive corporate overhaul for the industrial giant. Essentially, at the start of that financially-driven downturn, GE had allowed its finance arm to grow well beyond its core historical purpose of supporting the sale of GE's industrial products.
Image source: Getty Images.
With operations in everything from lending to insurance, GE was forced to take a government bailout, cut its dividend, and sell assets as it worked to get back on track. Since that point, the company has gone through two additional rounds of dividend cuts and asset sales as it looks to right the ship. Along the way, there have been three turnovers in the executive suite and some regulatory scrutiny of the company's finances (which is never a good thing). And even today it hasn't fully extricated itself from the financial issues that started during that last recession -- it is still dealing with long-term care insurance policies it issued that didn't work out as planned.
GE has put in a lot of work and is probably in better shape today than it has been in a very long time, but the pared-down GE still isn't firing on all cylinders. In the third quarter, the company's renewable energy division was operating roughly break-even and the power group was barely profitable. Unfortunately, that's actually an improvement over recent past results, because these two businesses have been cash drains for a while. While this improvement was encouraging, there's still a long way to go before these two divisions, which account for nearly 50% of the company's industrial revenue, are back on a sustained growth track.
The company's aviation operation, meanwhile, saw a roughly-80% decline in its profits year over year thanks to the ongoing headwinds from the coronavirus pandemic. Returning this business to its former glory will likely take some time. And the process really won't get underway until coronavirus vaccines have started to have a material impact on the direction of the pandemic. The only division that's doing reasonably well right now is GE's healthcare arm, which saw a 10% increase in revenue year over year in the third quarter. That said, the group's 16.6% operating margin was down around three percentage points year over year. And perhaps more troubling, GE's misfortunes in recent years forced it to sell a part of its healthcare business to raise $21 billion in much-needed cash. It's not a good sign when you start selling the crown jewels.
GE isn't going away, and its business has improved materially, but it remains a high-risk turnaround story at this point. Most long-term investors will probably want to avoid it.
3M: Better, but not perfect
You've probably figured out that 3M is the better-positioned industrial giant here. However, that doesn't mean you won't have to deal with some warts. In this case, the ugly side of the story is centered around product quality and manufacturing-related lawsuits. These are not small issues, and they could come with very material price tags -- but they are unlikely to derail the company over the long term, even if they cause some near-term headwinds. The stock is down around 26% over the past three years, largely thanks to this issue, which has pushed the dividend yield toward the high end of its historical range. While the roughly-3.3% yield may not seem huge, it is pretty notable for 3M.
Meanwhile, even during the brutal pandemic downturn, the company has been performing very well overall. Its worst-performing division, healthcare, had segment operating margins of 23.5% in the third quarter (down about 3.2 percentage points year over year). Healthcare was GE's best business, and its segment margins weren't anywhere near that. To be fair, the two companies do vastly different things in the healthcare space, so it's not a great comparison. But remember that healthcare was 3M's worst performer. The rest of the business (safety & industrial, transportation & electronics, and consumer) did even better. That's a stark difference between 3M's still-strong business and GE's largely struggling operations.
GE Dividend Per Share (Quarterly) data by YCharts
Industrial giant 3M will likely see its various businesses wax and wane over time, as you would expect, and it is dealing with potentially significant legal issues, but if you are a conservative investor looking for a reliable company, 3M wins hands down. And you get a generous dividend that has been increased annually for over six decades, easily putting 3M into the exclusive Dividend Aristocrat camp. Unless you like turnaround plays (and have the stomach to own them), 3M just looks like a better option for most investors.
Balancing risk and reward
GE probably has more turnaround potential as it works to get itself back on track. But there's still a lot of risk in the turnaround given difficulties the company faces in three of its four industrial businesses. While 3M probably doesn't have the same upside potential and is dealing with its own headwinds, the strength of its business and the historically high yield appear to be a better risk/reward trade-off. No, 3M won't be as exciting a stock to own, but that's kind of the point.
