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

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

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.”