Research Articles

Should Dividend Growth Investors Forgive General Electric? Part 1 - The Jack Welch Era

Julie C - Friday, July 15, 2011

Should Dividend Growth Investors Forgive General Electric?  Part 1 - The Jack Welch Era

There was a time in the not-too-distant past when General Electric Co. (GE) was the darling of Wall Street and everybody's favorite stock to own.  This was especially true during the Jack Welch Era, which spanned the years 1981 to 2000.  In truth, I agree that Jack Welch should have been given a great deal of credit for the job he did in profitably running this large conglomerate.  However, as I will soon demonstrate, I feel that Jack was given undue credit for General Electric’s stock price action during the last five years of his tenure.

The Jack Welch Era

The following logarithmic F.A.S.T. Graphs looks at the record that Jack Welch created at General Electric (GE) over the last decade of his reign.  From 1992 to calendar year 2000, General Electric’s earnings-per-share grew at the above-average rate of 13.1% (the orange line plots earnings multiplied by a True Worth™ PE ratio of 15).  This orange earnings justified valuation line, represents General Electric’s intrinsic value based on the company’s record of earnings growth over this time frame.  The blue line on the graph serves as a barometer and represents a normal PE ratio for General Electric of 25.3.

From the historical earnings and price correlated graph we see that during the years 1992 to 1995, price and earnings correlated very closely as the black monthly closing stock price tracked earnings.  However, towards the end of 1995 through year-end 2000, General Electric's stock price rose continuously, ultimately soaring far above its earnings justified valuation.  The point I'm trying to make is that I give full credit to Jack Welch for the creation of the orange line, which represents the operating results that General Electric achieved under his leadership.  However, the price action results should be credited to the stock market, not Jack, because he has no control over stock price.

My position is that the monthly closing stock price (black line) and the normal price earnings ratio (blue line) were generated by stock market action of which Jack Welch, or any CEO for that matter, has no real control over.  Keep in mind that the last years of Jack's reign at General Electric were during the infamous "irrational exuberant period."  Therefore, although Jack did a terrific job at General Electric running the company, at the time he was retiring the market was overpricing General Electric’s stock to the extreme. 

Consequently, from the nine-year performance results associated with the earnings and price correlated graph below, we discover the shareholder returns that General Electric produced (26% including dividends) were almost double the operating results that Jack produced (13.1% earnings growth and a dividend that increased every year).  General Electric closed calendar year 2000 at a price of $47.94, however, the earnings justified valuation (the orange line) only indicated a fair value of $20.

 

The following F.A.S.T. Graphs™, represented in normal scale with earnings (green shaded area) and dividends (light blue shaded area), even more dramatically illustrate how overvalued General Electric was when Jack retired.  Therefore, as I previously stated, Jack deserves a lot of credit for growing the company’s earnings-per-share at such a high rate.  However, an irrationally exuberant stock market deserves the credit (or blame) for the high valuation that General Electric was trading at from 1997 to 2000.

Conclusion Part 1

Towards the end of his tenure, Jack Welch aggressively was moving General Electric away from its core manufacturing business towards financial services.  Part of this is attributed to the fact that the service industries of which financial services was a major segment had ballooned into three fourths of the US economy by the mid 1990s.  Through acquisitions, GE, under Jack’s guidance, expanded financial services to nearly 60% of GE’s revenues.  This worked extremely well until the financial services blowout in calendar years 2008 and 2009. 

In the late 1990s, Jack also adopted “six sigma,” a quality control program pioneered by Motorola.  Jack Welch also established an e-business globalization initiative in 1999.  Under Jack’s guidance, General Electric was one of the fastest growing, most profitable and second largest company to only Microsoft (MSFT) by year-end 1999.  However, as good as all Jack’s accomplishments were, they did not justify the lofty valuation that the market was placing on General Electric upon his retirement.  In Part 2 we will cover the Jeffrey Immelt era at General Electric. 

Disclamier:  No positions at the time of writing.

 


Testimonials


“I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


“When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

(Wish I could be) Long FAST Graphs!!!”


“One more vote for the value of FAST Graphs™; just started a subscription to Chuck's great service (premium), and am having a ball analyzing so many stocks quickly.”


“I feel very ill-equipped to make investment decisions without Fast Graphs. :-)”


“Yesterday, I signed up for your F.A.S.T. Graphs™. It's a really amazing, valuable tool for checking over/undervaluation of stocks. Wish I had it years and years ago!!”


“Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


“About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


"Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


“If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


“I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


"Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


"Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


“Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


“I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


“I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


“I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


“Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


“Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


“Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


“Thanks for the F.A.S.T. Graphs™, Chuck. They are the best tool I've used.”


Recent Posts


Tags

GrowthOriented CSX NTES DLR RatofReturn SXL AMZN ENSG WBA TGT EV WST MA AIG OUTR OZRK BIIB STE FTI,HTZ LEN MNR PFE M value trap long-term returns LLY ORI ITC MIDD ATHM Fundamentals SNH value JOY FLO SWKS HPQ DOV WSM PM OKS BNS. OKE POM UL ATW FUL AIRM NPM CAT ADP AM CLF DRC fair valuation MDT QCOM PG T TEVA SYT CAM utility stocks OXY EAT DDS stock analysis MUR RDS.A NOC AMG SAVE DECK GE 3NSRGY SNI ACR VFC diversified machinery MRK investing for total return INTC VZ RBC COL WEC R HCP TXT MTZ dividends,earnings growth CINF SYK treasury Consumer discretionary LKQ DollarCostAverging Macro view Valuation AMGN BWLD PSX MSFT KCAP beta BKH sell SCL HSNI SHW market currents act CBI CHS MGA K RKT GOLD ADT BMO BDX investment BNS CLR RY HCBK healthcare FairValuation JRN BLL SYY ESRX APH cyclical HIBB MELI long-term growth dividendGrowth ECHO AVD IR, BG KO,CLX,CELG,JCP,GT,MSI,PEP,ED DTV REXX stockResearchTool CTSH NSR SHR RSG REITs FAST BEN SRCE GLT CACC dividends ABC EMR ONE GPC EWBC HON WFC SBUX US Economy TAC PRXL TOT BH Bond,TGT,UTX ROSE dividend-growth BMTC ABBV APD SIVB BAC FOMC TWX Market Outlook RRC EnergySector SLGN TE JKHY JWML.Y intrinsic value,stocks,earnings,fundamentals,stock research tool,due diligence Buffett VCO WU ETP value-oriented POWR SCHW MAIN DTEGY AGLP ARLP GAS GOOG Materials machinery DividendChampions TWGP GNTX KALU dividend paying stocks WLP CVX THO BIDU WASH SUBX DRI LXU TNC RIMM HRS PKG AFSI BMS AVP investing for income,growth and income CLX,EMR FF F Aristocrat GOOGL FBHS ACQ P TNGO true worth cash flows SHOO POR BANF ALTE WY CERN VAL JCI HCI CRLI D KMB XOM VRX market timing BAP ICLR UTX SBRA CASY growth DIS MAN EBAY LTM MGEE AFL investing for income TSCO HSY intrinsic value CVX,SWK,MCD,TGT,PG,WMT,JNJ,MDT,AFT,T,ED SO MHS EXC OGE RAI PNW EXLS FC DVA GEOS KO AEG OHI,EPR,WPG,JLL EMR, MMM fundamental stock research tool NKE PPL HCA SoundValuation CTBI biotech SYNA GPI TIF fair value best-of-breed AAPL BEAV value investing GPS blue-chip CB GIS FLIC WRLD WMT regional banks stocks BLK RMD BHB CGY cash flow IBM suvivorship basis TEG: WEC: C TSM Stock Research Analysis PCL BHP LQDT AET TGI HighQuality retirement ITW long-term PDFS NC INFY DLPH DHR DAN blue chip ULTA UNM RSO biotechnology long ideas LZB AGN dividend paying ANTM dividend growth JAZZ ASNA InformationTech AXP CNC SLW CBU CHD FinancialSector FRAN PNR HOG DFS RSG,RTN Dividend Champions FDO dividend-paying AAP ETR BPL suvivorship SWFT FairlyValued MCK PNM dividendpaying dividend SPLS AAN VMI Overvalued URI FAF CPB NLY AEP long-term investing utility Yield HD GPCM ARRS interest rates Aristocrats UNH PE Ratio MCY WFM Industrial FAST Graphs MO DGX dividend income NEE above-average TEF NSC X AFG VTR SNCR BOBE CTL CXRX Contenders GT MAT stock research MNST CNSL FB GD RTN food service BRLI MSA BOKF MTW COP MYL PE SAM LMT WHR DividendIncome NFLX CM PortfolioDesign ZUMZ CTCM THRM NSRGY Challengers LLL WGL AFL,CVX,ED,JNJ,MCD,PG,SWK,T,WMT,TGT,ABM,AFL,BEN,BMS,CB,CBSH,CTBI HRL V EPHC portfolio LL KFT INT BWP marketvaluation RS FL SFG BRS OII FISV DNB TU HE short ideas DTE ZBRA EE LINE banks RCII OSIS PCP ED Utilities Share Buybacks market ODFL RJF PowerOfCompounding ED:SCG PFG DGAS COH PRGO CAPE Ratio Telecommunications AFAM CCK technology SIG LOW DR SBR CELG ConsumerDiscretionary free cash flow earnings PBI DividendAristocrats CTG CHE DD INWK mid-sized MKC VVC EMC high-yield EK AMAG TMP GWW CRI PB SHPG ECL O ACN LH WAG JWN GME NOG FCFS ROST QCOR BCE PEP cashflow ESI SWK CBRL GES ENDP PAG UEPS APEI mid-cap IDA stock SPY MDP TIS BBBY AMP ACOM SON TGH CLX CAH BA NA FTR DKS consumer SCG ABM HP AKRX intrinsicvalue WIN DOM PNRA IPAR stock research tool dividend growth investing VRTU hyper growth stocks FRED investing KSS CFR BCOR economy long ITW, TUP BR COST STMP MMM COO fast-growing BAX GMCR due diligence InterestRates IBN highqualityR SJM DELL JSFT MNK Champions BBY TICC HNZ IR WMT,ROST,GIS,GE,JNJ,KO PPG CACI CSL KMP THC UHS GILD growth stocks AZZ HII HSC AMT FOSL ACI MPW CR CL XEL CVS Dividend Ideas NVS TROW DORM ACM AOS KMT total return PII HAS PEG DMRC AB fastgraphs FDX CIO AA MHP ACE TRV DRIP ORCL CanadianBanks JNJ AMBN BCR DE PRAA CSCO CMI CTAS JCOM CKSW capital appreciation MCD CE OHI MGRC macro MNTX NROM ANDE HBI HCN rate of return BF.B WWW ADM DPS RRD BMRC THFF HGT CPN SEIC ALB WVR UNP earnings growth CATY ABT BigFive,Canadian AMCX JPM XRX AZO UTHR Utilities Sector INGR SU POT LO BOFI MSCC MCHP MATW CTRX PCLN KR DOW ETN SILVER UN

Archive

Testimonials


“I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


“When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

(Wish I could be) Long FAST Graphs!!!”


“One more vote for the value of FAST Graphs™; just started a subscription to Chuck's great service (premium), and am having a ball analyzing so many stocks quickly.”


“I feel very ill-equipped to make investment decisions without Fast Graphs. :-)”


“Yesterday, I signed up for your F.A.S.T. Graphs™. It's a really amazing, valuable tool for checking over/undervaluation of stocks. Wish I had it years and years ago!!”


“Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


“About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


"Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


“If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


“I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


"Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


"Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


“Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


“I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


“I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


“I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


“Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


“Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


“Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


“Thanks for the F.A.S.T. Graphs™, Chuck. They are the best tool I've used.”