View from City Road: GEC faces a test of energy

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The Independent Online
THE GENERAL Electric Company's strengths stand out clearly in recession. When other companies are struggling, relying on their banks for support and searching desperately for signs of economic recovery, GEC keeps motoring.

Last year was ideal, with tough conditions in most of its markets proving too difficult for many of its rivals. True to form, GEC's performance was robust, with pre-tax profits rising by pounds 11m to pounds 818m in the year to 31 March. Earnings were unchanged at 18.6p a share.

More importantly, GEC increased its dividend, having left it unchanged last year and at the interim stage. The total payout rose to 9.6p a share, where it is less than twice covered. This may look low by GEC's historic standards - the dividend was covered five times 10 years ago - but it looks comfortable compared with many other industrial companies today.

GEC's resilience explains why the shares have outperformed the rest of the market by 12 per cent in the last year. They closed at 233p yesterday, up 8p.

While recovery remains elusive - GEC has not seen any pickup - the shares are bound to appeal as a safe haven. But once the economy turns, will they resume their long-term decline? Over the past decade they have underperformed by 70 per cent, notwithstanding their recent uptick.

The joint ventures agreed before the recession took hold have changed its outlook, with the Alsthom combination in power systems more than proving its worth last year, helped by orders for gas-fired combined-cycle power plants. At first sight it looks as if divisional profits at pounds 157m almost equalled GEC's investment, but this impression owes much to hefty provisions. Alsthom's profits growth will slow this year.

Joint ventures apart, last year's results do little to address long-term questions about the group. The company increased net cash - allowing for debenture loans - by pounds 444m, taking the total to pounds 1.39bn. This is almost as high as in 1987. But it is not at all clear that Lord Weinstock, the 67-year-old managing director, wants to invest this money in existing businesses or more joint ventures rather than pay it out in ever higher dividends.

Given the record to date, the latter looks more likely. Only buy for the 5.5 per cent yield and take the cash rather than the scrip dividend.

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