Good morning and a hearty “Happy Boxing Day.” Today will be my first granular-level post, focusing on a specific stock and my views positive or negative. As with all of my analysis, please remember I am just a guy. Not a professional and YMMV.
My dilemma today is what to do with GE, which has been one of my biggest losers over the last few years. This is unfortunately a hot topic for many dividend investors, who have been (mostly) able to rely on a strong dividend from this stock for decades. It had until recently been a cornerstone of any recommended dividend portfolio.
But a few weeks ago the dividend was cut in half, due to insufficient free cash flow.
Let’s all pause for a moment to recall Eddie Murphy’s take on divorce – HALF! That’s how I feel about the 50 percent dividend cut. Just like he says it.
Ugh and more ugh.
My “Cash FIREhose” strategy since I began investing has been to invest $9,000 per month in a mutual fund portfolio, and to invest another $3,000 per month in my dividend portfolio (I own GE as part of my dividend portfolio). Any additional monies go into cash reserves and real estate. I allocate the $3,000 per month that I invest in the dividend account to stocks in my portfolio that I believe are undervalued, or to cash until a buy opportunity presents itself. Occasionally I will add a position in a new dividend stock (CVS and PG most recently). To date I have sold nothing from the portfolio, other than a penny stock in which I foolishly invested in 2012 on the advice of a friend. In a future post I will outline the criteria I use to select dividend stocks in which to invest. To ensure that I am not “setting and forgetting,” I try to carefully review each of my investments at least twice per year, and the time has come to evaluate GE.
What should I do with GE as we approach the end of 2017? Sell and use the loss to carry forward against future capital gains, and reinvest the balance in another stock? Do I keep it and hope for a rebound? Invest more to profit on the rebound? Is this a classic example of a solid company with good fundamentals on which the market has unfairly soured?
I am hoping not to sell any of my holdings for the foreseeable future, which may limit the usefulness of a carry-forward loss, which I would incur if I decided to sell now. But this is not a reason to keep a stock that could keep dropping. My experience with “doubling down” on losers has been very bad (I have thrown good money after bad and lost even more money as a result – see below). Even if I don’t buy more, if the stock continues to drop, in another year or two I may wish I had pulled the trigger now to cut my losses.
As of today, GE can be bought for roughly $17.91. It has not been this low since 2011. This is down more than 44 percent from its 52 week high of $32.05 (December 2016), and the company has been in a virtual free fall since the end of 2016. The P/E is 20.3 (still not cheap), and its dividend is 12 cents per share, or 2.76 percent (a decent dividend, but not really a premium for the risk the stock may present). It is currently trading at a bit less than 17 times forward earnings (predicted to be $1.07 or so in 2018). The dividend was cut in half a few weeks ago. Even since I started to write this post today (December 26, 2017), the stock has dropped another 50 cents or so.
On the good side, the company has had solid net income of between $9 and $15 billion or so for five of the last six years (excluding 2015, in which the company sold off its financial arm, GE Capital). It continues to do business around the world, and has recently obtained new contracts for locomotives in Canada, and multiple windfarm electricity contracts in Thailand and Europe. I like the fact that the company is investing in renewable energy, which I think will be more and more significant as time goes by.
New management has recently ascended, and the company has announced plans to sell its recent Baker Hughes energy acquisition. It also announced that it will divest its lighting and transportation units. It plans to focus on three core areas going forward – aviation, healthcare, and power, addressing criticisms that its sheer size and scope has limited its ability to properly manage its disparate holdings and grow earnings. Insiders have recently made large share purchases.
I own roughly 481 shares, at an average price of $25.70, for an overall investment of $12,361.70. The shares are currently worth $8,470.02. Overall I am down $3,923.05 on this stock, which I have owned and gradually purchased additional shares of since 2012. I have lost more money on this stock (on paper anyway) than any other stock except DDD, an early investment in a 3D printing company in which I “bought more” when I thought the stock had reached its nadir, only to watch it plummet much further.
Tsk, Tsk, Tsk….Risk Risk Risk
“If you choose not to decide, you still have made a choice”
Freewill, Rush 1980.
This is not an easy decision on my part, and as with many difficult decisions in my life, I may just punt. Classic dividend investing philosophy counsels in favor of getting out when dividends start being cut. There is further downside risk in holding it, there is big risk in “buying more,” and there is “opportunity cost” risk for the money that is tied up in this stock, even if I do nothing.
There are folks who rate this stock a buy at present. See their perspectives here, here, here, here, and here (this one really recommends an options play rather than a straight-up buy). And not without good reason – the stock price has been hammered, the book value and cash flow of the company can justify a much higher price, and the dividend will likely be raised if (as expected) cash flow improves. Insiders are buying in large numbers. Morningstar rates the stock as extremely undervalued, with a fair value estimate of $26. Credit Suisse rates it at “Outperform.”
But more and more analysts are sour on this stock. Examples are here, here, and here. Most consensus surveys rate the stock as a Hold or Avoid. Companies that cut their dividends usually don’t recover, and those that recover don’t do so overnight.
I’m holding on, at least for now, because I see promising signs that the business will be managed more efficiently and effectively going forward, and because there is nothing on the horizon (competitor, regulations, lack of demand, etc.) that looks to threaten its core businesses. So I’m convinced the turnaround will work out for shareholders, although it may take a few years for all of the new management policies to pay dividends (PUN, thank you Michael Scott). The dividend cut has spooked the market, even though it was a responsible decision by the new management.
But I’m not buying more. Too much risk of further losses, and I’m still raw from my “buying more” DDD experience (yes, I know GE and DDD are apples and oranges, but my emotions — which have often derailed my decision making, and will be the subject of a future post — still unfortunately play a role in my investing decisions).
My indecisiveness on this issue underscores the need to develop an overall selling strategy. It may be time for Dividend FIREman to actually come up with one.
What do you think? Anyone else own this stock and is still holding on? Anyone sold it recently? And finally, is anyone buying?
Thanks as always for your comments. Happy Investing!