General Electric, as your grandparents knew it, is gone. Over the years, the company has broken itself up into pieces, spinning off different businesses and leaving the aerospace segment with the company's original ticker symbol.
Now, GE Aerospace(NYSE: GE) stands alone and offers investors a compelling business model capable of excellent long-term investment returns. The market has already shown GE Aerospace a lot of love; the stock has risen 80% over the past year.
You never want to chase a hot stock mindlessly, but GE's impressive rise doesn't necessarily mean the buying window is closed. Here's what investors should consider and whether they should buy, sell, or hold the stock today.
A wide-moat business with recurring revenue
GE Aerospace manufactures commercial and government jet engines. It estimates that GE technology powers three in four commercial flights, and that 3 billion people flew last year on GE-powered aircraft. The company's engine fleet includes approximately 44,000 engines in the commercial sector and another 26,000 in defense. It's one of four primary companies that dominate the aviation engine industry.
A competitive moat is the foundation for most successful long-term investments. GE Aerospace checks these boxes in the aerospace field. Jet engines are highly technical and complex products; there is a degree of expertise that is difficult to replicate. A fleet of aircraft using GE engines can't easily start swapping in a different manufacturer. There are technical barriers to that, including the know-how technicians need to maintain and service those engines.
GE's wide footprint essentially locks in business. The company generates roughly 70% of its annual revenue from parts and services, including maintenance and repairs to its fleet. A typical commercial jet can last for two or three decades, so each engine in service generates many years of steady revenue after the initial installation. Investments in new engines could fluctuate with the economy, but this base of service revenue means GE Aerospace should hold up relatively well through economic ups and downs.
Earnings and dividend growth ahead
GE Aerospace is poised to become a dividend growth monster, with robust total return potential that should interest any long-term investor.
Management has laid out revenue growth guidance through 2028 that starts with high-single-digit revenue growth this year, followed by double-digit growth that will slowly cool to high-single-digit growth by 2028.
Analysts expect the company to grow earnings by 30% annually during this time, which means GE can aggressively raise its dividend without dramatically impacting an already modest 12% dividend payout ratio.
GE Cash Dividend Payout Ratio data by YCharts
The stock's dividend yield is just 0.69% today, but given the room for significant increases, that should quickly pick up over the next few years. Management's most recent dividend raise was a whopper at 250%.
Naturally, future increases will likely be smaller, but investors could realistically see multiple 20% raises if earnings grow accordingly. This is a potent recipe for market-beating returns, so long as investors can buy shares at a reasonable valuation.
Buy, sell, or hold GE Aerospace stock?
Considering GE Aerospace's trajectory, it makes sense that Wall Street flocked to the stock over the past year. The million-dollar question is whether there is still juice to squeeze.
Management is guiding for earnings per share of $3.95 to $4.20, valuing the stock at a forward P/E of about 38. That's a more expensive earnings multiple than the broader stock market, but GE Aerospace would justify that if it grows earnings as analysts expect. Importantly, this is a multi-year growth outlook, so the company is more likely to grow into the stock's valuation, even if year-to-year growth falls a little short.
There is always some risk in buying a stock for growth that hasn't technically happened yet. Still, at a potential forward PEG ratio of just over 1.2, GE would have to fall dramatically short of expectations for the investment not to work out at least OK in the long haul. GE Aerospace is a high-quality business, so this seems unlikely.
Investors seeking to own shares for at least the next few years can buy a fantastic business at a reasonable price today.
Should you invest $1,000 in GE Aerospace right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
