GE stock: Despite the electrifying drop, hang on

ByABC News
October 27, 2008, 5:01 PM

— -- A: General Electric is the bluest of the blue chips. And not surprisingly, the stock has found its way into most investors' portfolios.

GE has been the No. 1 stock among the portfolios of USATODAY.com readers for years. You can see what other stocks USATODAY.com readers own in the exclusive USATODAY.com Readers' Choice list, which is also available in the print edition.

But GE hasn't been acting like a blue chip lately. Recently, the company reported sharply lower earnings, down 22%, in its third quarter. Read more about the quarterly report here. The company also agreed to pay Warren Buffett of Berkshire Hathaway a staggering 10% annual dividend on preferred stock he's buying. That a AAA-rated company would be willing to pay 10% interest indicates how badly it needs, or wants, the cash and the difficulty it's having raising it by conventional means.

Investors often make the mistake of thinking that if they own GE they're diversified. GE is massive and has businesses in many sectors, from finance to manufacturing and media. But, owning GE is much riskier than owning a diversified basket of stocks.

So, GE has shown itself to be vulnerable in the current downturn. Its stock has gone from more than $40 a share to less than $20 the past year. What do you do if you own it?

To analyze what to do with GE, we'll put the stock through the four tests Ask Matt puts every stock through:

Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading GE's trading history back to 1962, we see the company generated an average annual compound rate of stock appreciation of 7.1%. That doesn't include dividends the company paid. Currently, the stock is yielding 6%, but historically, that yield has been closer to 2.8%, according to GE. If you add 2.8 percentage points to the 7.1% stock appreciation, that gets you to a 9.9% annualized return. That's slightly more than the 9.5% average annual return of the Standard & Poor's 500 during that time, which includes dividends, says IFA.