Dear Mr. Berko: Do you still believe that GE is a strong long-term stock?
In light of their reported earnings of $14 billion, on which they paid no taxes, don’t you think this tax avoidance will hurt GE’s reputation and stock price?
If you think this tax scheme won’t hurt the company, how do you feel about GE’s earnings and stock price over the next four to five years? –P.W.: Elkhart, Ind.
Dear P.W.: I posilutely strongly believe General Electric Co. (GE, $20) should be a core holding in every long-term growth portfolio. This massive $145 billion conglomerate derives revenues from its expertise in business and consumer finance; appliances; energy; health care; power distribution; oil and gas; aviation; lighting; consumer products; software; nuclear power generation; water systems; marine and military engines; steam, wind and gas turbines; global banking; real estate financing; medical diagnostics; pumps; pipelines; compressors; valves; locomotives; rail services; traffic control; chemicals; and infrastructure construction in more than 105 countries, and the list just goes on and on.
This portfolio of businesses, plus extremely talented management, focuses its efforts on value-added components for customers, allowing GE to earn healthy returns in most of its markets. And GE’s flexible management is able to adjust focus to meet changes in world events and demand.
GE now has a heavy concentration on clean-energy products, including the design, manufacture, sale and installation of gas and wind turbines, and management’s ability to combine businesses with strong synergies lets GE make significant investments in new and expanding sectors with less exposure to risks than its competitors.
And its legendary global presence gives management critical information about its competitors, allowing GE an important leg up in emerging market economies.
Prior to the recession of 2007-09, GE enjoyed net profit margins of 12 percent to 13 percent. And after the boom went bust, revenues crashed 25 percent in 2009 and NPMs fell to 7 percent.
Revenues are still a long way off from the peak of $185 billion, but NPMs should reach a record 13.4 percent by 2014, while share earnings should increase magnificently to $2.55. In other words, GE will have record earnings on lower revenues with 41,000 fewer employees.
And several of the Street’s finest analysts believe the dividend could be $1.05 per share by 2014, and the stock price could trade in the low $40s. There are few finer companies.
Yes, GE’s net income last year was $14 billion and didn’t pay a peso in federal taxes, but that doesn’t make GE a villain. Show anyone how to legally avoid paying taxes, and they’ll hop on it faster than a duck on a June bug.
There are two reasons GE paid no federal taxes, and both are as straightforward as a yardstick.
(1) GE Capital, thanks to Goldman Sachs, Merrill Lynch and other Wall Street lovables, lost billions in the financial crisis. And like all tax-loss carry-forwards, GE used these losses to reduce its tax bill.
(2) The second tax break is a horse of a different feather. GE has a tax division of 977 employees dedicated to finding creative loopholes. Then GE employs 19 lobbyists, who often buy boxes of chocolate and steak dinners for members of the House and Senate, who then will approve the loopholes. As a result, GE moved billions of profit dollars to its nontaxable overseas account.
GE is one of many corporations who avoid taxes in this manner. And this episode will have no more effect on the price of GE’s stock than would the advent of another fly to a slaughterhouse.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com.