General Electric (GE) features on the list of ten dogs of the Dow. This means that, on December 31, 2011, it was one of the highest-yielding Dow stocks. On Friday, the company announced a dividend hike of 12%. This is the fifth increase in three years time. This news has sent bullish signals to the market. However, the question is: Will GE be able to sustain the 3.51% dividend yield?
In order to judge whether the company will be able to sustain this dividend yield, we need to analyze the financial muscle of GE. The following chart shows the historical trend of the Operating Cash flow (OCF) yield and the Free Cash flow yield (FCF).
Apparently, it seems like the OCF and FCF yields are declining. However, it should be clearly mentioned that this may not portray an accurate picture of the strong cash flows that the company is currently generating. There are two reasons to explain this phenomenon:
The stock is up by 20% on a year-to-date basis. The OCF yield simply equals to OCF/stock price. Therefore, a rise in the stock price has led to a decline in the cash flow yields for this year.
More importantly, GE's cash flow from operations includes a dividend from GE Capital (GECC). Recently, GECC restarted paying dividend to its parent. This segment got hit by the 2009 recession and did not pay dividends to its parent from 2009 to 2011. I have excluded that dividend from the calculation. (Had that dividend been included, the OCF yield curve would have been upward sloping)
This chart shows the dividend-paying trend of GE. The huge dip in 2009 and 2010 depicts the damage caused by the recession. However, the chart shows that the good news for the investors is that the company is regaining its strength.
The Company's Expected Performance In The Future
The Forecast for 4Q
The aviation segment is expected to post strong results this quarter. The aviation spares sub-segment is also expected to grow sequentially (as compared to 3Q performance). I have already written a detailed piece on the aviation segment.
The company continues to expect strong growth in its industrial businesses. By industrial, I mean Aviation, Healthcare, Transportation, Power & Water and Oil & Gas. Management provided some commentary on the future growth of the industrial segments in its investor meeting in September. Sell-side analysts expect double-digit growth in the 'Industrial EPS'. The CEO Jeff Immelt forecasts the Industrial segment revenues to grow by 10% this year and 5-10% in the next year. Following is a list of the estimates for different Industrial segments:
As far as the margins are concerned, the sell-side believes that it is highly possible that the company will achieve an improvement of 30 bps - 70 bps this year. Also, the margins are expected to improve in the next year due to certain cost savings.
Cash and Share Repurchase
Plenty of cash is expected to come in the near-term as GE is looking for a good deal to get rid of its NBC Universal stake. Also the dividends from GECC and an improvement in the industrial segments are expected to bring in more cash for the company. The company also plans to bring down the share count below 10 billion. (Currently the shares outstanding are 10.486 billion). The share repurchase will act as an incremental lever for the EPS growth.
In Friday's announcement, GE's board also increased the existing share-repurchase authorization by $10 billion and extended the repurchase plan through 2015, which otherwise would have expired on December 31, 2013. As of the end of the third quarter of 2012, the plan had approximately $4.9 billion in remaining authorization.
The following chart shows the dividend yield of GE:
The company is generating positive operating and free cash flows. Currently, the company holds around $86 billion of cash reserves. Debt is not a big issue for the company. With a solid plan for the share repurchase in the future and a strong performance expected from the industrial segments, the company definitely seems to be in a position to sustain its dividend yield.