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April 15, 2015 – by Richard Band
The extreme corporate makeovers are coming fast and furious. We’ve had two in just the past week…
First, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) announced a massive merger and restructuring. Plus, General Electric Company (NYSE:GE) has essentially repudiated its Jack Welch legacy by agreeing to dump the vast majority of its financial operations.
I applaud Shell’s move, with the proviso that “everything hangs on execution,” and I feel the same way about the GE deal, which announced Friday.
GE is selling $36.5 billion worth of real estate to the Blackstone Group LP (NYSE:BX) and Wells Fargo & Co (NYSE:WFC). General Electric also plans to shed enough of its financial businesses to shrink its share of the parents’ consolidated earnings to less than 10% by 2018.
What will GE do with the cash proceeds of all these divestments? CEO Jeff Immelt promises to return approximately $90 billion to shareholders by 2018 through a combination of buybacks, dividends and the split-off of Synchrony Financial (NYSE:SYF). So far, so good.
But execution will again hold the key to GE’s long-term success. To replace the lost profits from GE’s financial arm, General Electric will need to build up the earnings power of its industrial businesses.
I’m confident GE can pull off this transformation. However, we’re not talking about a slam dunk here.
It may take a more visionary CEO than Jeff Immelt to complete the job. I hope GE’s directors will keep a close eye on him and demand rapid progress. Otherwise, you can be sure Wall Street will be clamoring for his ouster.
Given the positive developments at General Electric in recent days, I’m raising my buy limit on GE stock. General Electric’s current dividend yield is 3.3%.
I’m also making a change in my lineup of utility stocks. American States Water Co (NYSE:AWR) has performed brilliantly, gaining almost 169% (with reinvested dividends) since March 2011. However, AWR stock is now richly priced at 25 times estimated 2015 earnings.
Accordingly, I’m shifting AWR to a “hold” in another portfolio and replacing it with OGE Energy Corp. (NYSE:OGE). OGE Energy gives you a low-risk play on the coming recovery of America’s petroleum industry. OGE’s service territory includes some of the nation’s most prolific oil and natural gas fields, as well as the giant crude-oil storage hub in the city of Cushing.
Last year, OGE hived off its interstate pipeline network and natural gas field-services business into a limited partnership, Enable Midstream Partners LP (NYSE:ENBL), retaining a 28% interest for itself (as well as a 60% economic share of the general partnership). As the natural gas industry rebounds, ENBL will pump cash distributions upstream to OGE, supplementing the steady growth of the parent’s bread-and-butter utility business.
Enable Midstream Partners’ management predicts that dividends will grow 10% a year through 2019 — an extraordinary rate for a utility stock. ENBL stock’s current dividend yield is 3.1%, somewhat below the average utility (but easily offset by the superior projected growth rate). OGE pays dividends at the end of the first month in each calendar quarter. Buy OGE.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.