It is that time of the year when investors should consider upcoming dividend changes for General Electric (GE). Though many investors are still smarting from the dividend cut of several years ago, those with faith in the future of General Electric have been buying since the price lows of 2009. After the dividend reduction in 2008 from 31 cents a quarter to 10 cents, it has been increased four times since 2010. The table below shows the increases since the cut in 2008, which clearly indicates a desire on the part of GE management to steadily increase the dividend payments.
|Ex-Date||Previous Dividend||New Dividend||% Increase|
Over the two-and-a-half-year period from the first increase in June 2009, the dividend has increased by 70% -- not counting the possible new dividend to be declared in December 2012. What that dividend increase might be is worthy of consideration for a possible investment. Exploring the past dividend history of General Electric could certainly be a clue to future payments.
Prior to the cut in 2008, the dividend payouts were in the general area of 50% of earnings per share. With the history of dividend increases in December of each year, it would appear that increases could very well be based on management's view of earnings per shares for the upcoming year. Below is a history of GE's dividend payout ratio prior to the cut in 2008, which should lend some credence to a "guess" on the upcoming change in dividend policy.
From the above table, we can assume a reasonable case for GE to maintain a dividend-to-earnings-per-share ratio in or around 50%. The current estimate for full earnings per share for GE this year is $1.51 and $1.70 for 2013. As the upcoming dividend change is based as much on expected earnings for 2013 as it is for 2012, a good strategy for the upcoming "guess" would be to use both as a guide or to average the two years at $1.60.
Possible Dividend Changes
1. If we assume a 50% payout ratio on our average EPS, we arrive at a $0.20 dividend, which would be a 17% increase.
2. If we assume a 50% payout ratio on expected EPS for 2012 of $1.51, then the dividend will increase to $0.19, which would be a 11.7% increase.
3. If we assume a 50% payout ratio on expected EPS for 2013 of $1.71 per share, then the dividend will increase to $0.21, or a 23% increase.
The fly in the ointment, so to speak, is the concerns over the fiscal cliff that have changed the face of dividend policy over the last several weeks. Some companies have chosen to distribute as many as two years in 2012 in order to beat a possible tax increase, while suggesting that future dividends will be reduced. General Electric might consider such a change. That is very difficult to predict, so I will leave that guess to the reader.
It is my belief that GE will raise the dividend at least 2 cents per share and very likely might push it up 3 cents to 20 cents. At the current price ($21.13), an increase of 2 cents will produce a current yield of 3.6%. An increase of 3 cents will produce a current yield of 3.79%.
A glance at historical yield levels of GE offers a clue as to whether or not current yields and possible future yield offers the investor a good valuation opportunity.
Click to enlarge images.
Source: My personal database.
Since the bear market yield highs in the 1982 period, when the level of long-term interest rates were in excess of 15%, the current yield of the shares have rarely been much higher than the 3.5%-4% range. The spike in 2009 was due to the dividend cut and should be ignored. Based on the above chart, the current yield is in the mid- to upper range of long-term yields. A dividend increase will place the shares in the upper range above 3.6% -- a good valuation level for current yield.
The chart above indicates that the downtrend from the area just above $23 to the low just below $20 may have been broken so that the $20 area should represent good support. Coupled with the support from yield, this level is a good one of excellent valuation for investor entry points.
Disclosure: I am long GE.