Are you Worried about a Breakup?

Since posting about my recent purchase of GE I’ve been emailed a number of times asking if I’m concerned about the increasing pressure being exerted on GE to breakup. Well the answer is no, absolutely not! Personally, I think that the real value of a world class conglomerate like GE would be unlocked if it was broken up into their separate operating divisions. It’s very rare that large conglomerates trade at a value equal to the sum of their parts and I think that GE is no exception. As a shareholder of a conglomerate you really have nothing to lose from a breakup. Instead of owning many shares of one world class company you’d own less shares of many world class companies. The only difference being is that you can sell the divisions you don’t like and in all likely hood the value of the separate companies would be greater than that of the conglomerate. So to make a short answer long----breakups are an investors best friend.

GE

I recently initiated a position in GE for the following reasons.

"General Electric is one of the largest and most diversified industrial corporations in the world. GE is engaged in developing, manufacturing and marketing a wide variety of products for the generation, transmission, distribution, control and utilization of electricity. Some of GE's products include major appliances; lighting products; industrial automation products; medical diagnostic imaging equipment; motors; electrical distribution and control equipment; locomotives; power generation and delivery products. Their operations are divided into six different segments; Infrastructure, Industrials, Healthcare, Commercial Finance, GE Money and NBC Universal."

-2008 Estimated PE – 13.8X
-2009 Estimated PE – 12.5X
-2010 Estimated PE – 11.25X
-Current Yield – 4.05%
-5 Year Average Yield – 2.6%
-Current Payout Ratio – 53%
-5 Year Historical Payout Ratio – 52%
-3 year dividend growth rate – 10.56%
-5 year dividend growth rate – 9.16%
-Argus rating of "Buy" and a 1 year price target of $40
-S&P rating of "4 Stars", "Buy" and a 1 year price target of $38
-increased their dividend every year for the past 31 years.
-their dividend has been paid quarterly since 1899

I like the fact that GE has clearly defined goals (8% organic growth) and I believe they are definitely moving in the right direction with their “ecomagination” concept. I don’t think it will be long until green technologies will start to really sell, and GE is taking an aggressive stance on their green (and profitable) technologies. They also have a dominant global position in one of my favourite areas, infrastructure. Shares of this world class comglomerate have recently been under pressure due to an earnings miss caused by weakness in their financial services, healthcare and domestic consumer segments. However, their global and infrastructure segments remained strong and I believe they'll continue to due so. Although, GE may experience further short term declines I iniated this position for the long term and just couldn't resist picking up some of this world class company at valuations not seen for over a decade.

[As always please do your own research and consult your own financial advisor before making any decisions.]

US Dollar - MMM & GE

Some concerns have been raised about buying MMM or GE because of the potential of a rollover in the US economy and a depreciation of the dollar. Although I’m also a little concerned about the US economy and the dollar I am comfortable holding MMM in a downturn because 60% of their revenues now come from outside the US. In my opinion this acts as a natural hedge against a depreciation in the US dollar ie- US dollar goes down, but because they report in US dollars 60% of their revenues have to be converted back into US dollars which would inflate their earning, which will hopefully offset all (or some) of the losses you would incur from a depreciating US dollar.

MMM vs GE

For those of you that are toying between MMM and GE here is a breakdown of the two companies. (I originally posted this on a forum at www.moneysense.com)

MMM

PE: 14.5
ROA: 18.65
ROE: 37.82
Dividend Yield: 2.5
Price/Sales: 2.37
Price/Book: 5.44
2007 projected P/E: 15.7
2008 projected P/E: 14.2

-Dividend History: Paid quarterly since 1916
-60% of their revenues now come from outside the US
-Have a long history of innovation
-S&P Rating: 3 stars, Hold, $83 target price (12% upside)
-Argus Rating: Buy, $89 target price (20% upside)


GE

PE: 18.22
ROA: 3.02
ROE:18.65
Dividend Yield: 3.09
Price/Sales: 2.29
Price/Book: 3.33
2007 projected P/E: 16.33
2008 projected P/E: 14.6

-Dividend History: Paid quarterly for over 100 years
-significant % of their revenues now come from outside the US (couldn’t find the exact number)
- S&P Rating: 5 stars, Strong Buy, $45 target price (23.5% upside)
-Argus Rating: Buy, $42 target price (15% upsside)

I’d just like to note that I like the fact that GE has clearly defined goals (8% organic growth) and is definitely moving in the right direction with their “ecomagination” concept. I don’t think it will be long until green technologies will start to really sell, and GE is taking an aggressive stance on their green (and profitable) technologies. I really like GE and plan on buying them in the future. I chose to buy 3M strictly on a valuation (and ROA, ROE) basis but I would take a serious look at GE if it pulled back another 10% or so. I would be more comfortable buying them when their forward P/E is in the 14X range. I just don’t feel that 8% organic growth deserves an 18X multiple (especially with a company as huge as GE).

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)