General Electric (NYSE: GE) and Honeywell (NYSE: HON) are two of the largest industrial conglomerates in the country, each with a market capitalization of more than $80 billion.
Both of their shares are up over the past year, but it's far from clear if one is a better buy than the other. Some metrics seem to favor GE, while others favor Honeywell.
The here and now
Both companies are industrial conglomerates that are more than a century old (GE was founded in 1892, Honeywell in 1906). Both operate in many different industrial sectors, including aviation and transportation. Both stocks' prices have increased over the past year, although most of GE's rise has occurred over the past two months:
Despite these gains, however, both stocks are trading in line with comparable industrial conglomerates:
It isn't enough, however, to just look at current conditions when evaluating a company. One also needs to consider the company's past and its future.
What's past is past
Today, both companies are focusing on their core industrial businesses, including aviation and transportation. Just 10 years ago, though, that wasn't the case for General Electric.
For this reason, it's difficult to gauge GE's future trajectory based on its past performance as a whole. But looking at the history of its industrial businesses is a good way to assess how it compares to Honeywell:
|Company||1-Year Earnings Growth||3-Year Earnings Growth||5-Year Earnings Growth|
|GE Industrial Divisions (Aviation, Energy, Healthcare, Power & Water, and Transportation)||0.6%||22.6%||18.5%|
Honeywell's earnings have certainly been growing at a smoother trajectory than GE's over the past five years. But even lumpy growth is still growth. The question is whether that growth is likely to continue.
One metric that can be used to measure a company's growth potential is the cash flow to CapEx ratio. The higher the ratio, the easier it is for a company to fund expansion and growth through capital expenditures. Both companies have high ratios, although Honeywell's is quite a bit higher, indicating ample capacity for growth:
|Company||FY 2014 CF to CapEx||FY 2013 CF to CapEx||FY 2012 CF to CapEx|
Both Honeywell and GE have been quite clear about their plans. GE is refocusing on its core industrial businesses and has promised increasing dividends and 17% margins by 2016. Honeywell is in the second year of a five-year plan that promises double-digit earnings and dividend growth by 2018. It's also one-upping GE by projecting at least 18.5% margins by 2018.
Thus far, both companies seem to be successfully executing their plans. Honeywell's most recent 2015 guidance called for 17.9% operating income margins -- less than one percentage point away from its 2018 goal. The company also increased its quarterly dividend by 15% in the last quarter. It has adjusted its growth forecast downward for the year, from about 3% to about 2%, mostly due to the strong dollar, but otherwise seems to be hitting its benchmarks.
GE has successfully continued to sell off its financial assets and is planning to return those proceeds to shareholders through share buybacks and dividends . It has been having a rockier year than Honeywell, as weak oil prices have negatively affected profits from its large oil and gas segment. Nevertheless, it has grown operating margins in its industrial segment by 1% in the most recent quarter and is forecasting continued -- although unspecified -- margin expansion for the year, and organic growth of 2% to 5%.
Both GE and Honeywell are strong, solid companies, and both seem to be executing their strategies well. This makes it difficult to choose between them, but right now, I'd give Honeywell the slightest of edges over GE.
GE starts off with a stronger dividend yield (3% as opposed to 2%), but I expect Honeywell's dividend to grow faster than GE's since Honeywell has made rapid dividend growth a priority. Meanwhile, GE will return the proceeds of its recent business divestitures to shareholders through buybacks in addition to potentially increasing its own dividend. Therefore, I call the dividend a wash.
The growth story is another issue entirely. Honeywell doesn't have exposure to the oil & gas sector like GE does. I predict that weak oil prices will continue to weigh on GE's earnings for at least the next several quarters, and possibly longer. Honeywell also has more capacity in its cash flow to fund significant capital expansion and growth.
While I think both companies will perform well for investors in the coming years, if I had to pick one or the other, I would invest in Honeywell.
John Bromels has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. 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.