GE’s smaller segments include Energy Management (5%), which is what remains of GE’s original business. Home & Business Solutions (5%) produces GE appliances and lighting fixtures for both consumer and industrial applications. Finally, the Transportation segment (4%) produces and services high-horsepower diesel locomotives and motors for a variety of applications.
Alternatives
In order to replicate the diversity GE brings to a portfolio, you would need (in descending order of relevance) a financial institution, such as Wells Fargo & Co (NYSE:WFC), which is my favorite due to its strong financial position, ambitious growth plans, and its above-average dividend yield of 2.8%. Additionally, even after the 23% gain so far in 2013, Wells Fargo & Co (NYSE:WFC) trades for just 11.7 times TTM earnings, and is projected to grow earnings at 8% annually over the next few years.
You would also need a manufacture of engines and power equipment. Pratt & Whitney, which is a subsidiary of United Technologies Corporation (NYSE:UTX) is worth a look here, due to its excellent jet engine business, and other revenue streams that come with the company, making it a good diversification play by itself. In addition to jet engines, United Technologies Corporation (NYSE:UTX) makes Sikorsky helicopters, Otis elevators, and Carrier air conditioners, just to name a few of the company’s products. However, I think United Technologies Corporation (NYSE:UTX) is a bit too expensive right now, trading right at its 52-week high, and at a P/E of 18.5.
We’re not quite done yet! To match the diversification of GE, you would also need a healthcare equipment company such as Hologix, an oil and gas company like Oceaneering International (NYSE:OII), an appliance maker like Whirlpool Corporation (NYSE:WHR), and a transportation company like Union Pacific Corporation (NYSE:UNP).
So, why buy GE instead?
Not only is GE very diverse, it is also very reasonably valued considering the growth potential of its businesses. GE currently trades at 16.5 times TTM earnings, which are projected to rise nicely over the next couple of years. Most of GE’s core businesses should benefit tremendously from the increase in infrastructure spending and financing, as well as the increased demand for energy that is projected to occur in both the U.S. and GE’s emerging markets. As a result, GE is expecting earnings of $1.66 this year (2013), growing to $1.83 and $1.99 in 2014 and 2015, respectively. This corresponds to a 3-year average annual earnings growth of 9.6%, which more than justifies the P/E.
Additionally, GE pays a very nice 3.2% dividend yield, which it has a great track record of increasing. The current yield represents a payout ratio of less than 50%, meaning that the dividend is in no danger of decreasing, and should increase proportionally to the earnings gains that are expected. The bottom line is that GE is an excellent way to add diversification and growth potential to your portfolio all at the same time.
The article An Excellent Play for Diversification and Growth in Your Portfolio originally appeared on Fool.com is written by Matthew Frankel.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of General Electric Company and Wells Fargo. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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