Back in April of this year I wrote about General Electric's (NYSE:GE) dividend and concluded that the stock was a bargain for dividend investors. I estimated in that article that GE would boost its dividend by about 12% for 2013 compared to 2012, and on Friday the company did just that. GE increased the quarterly dividend from 17 cents per share to 19 cents per share, an increase of 11.76%.
Now, the fact that this is almost exactly what I predicted in my analysis isn't really relevant; I was trying to come up with a reasonable average and that number just happens to coincide with the new dividend increase. But this increase does further support the idea that GE is on its way to becoming a go-to stock for dividend investors. Both yield and growth are the key ingredients here, and GE has plenty of both.
Dividend data from GE IR
The financial crisis of 2008-2009 caused GE to cut its dividend by 2/3, but since then the dividend has been growing at an impressive pace. After the current increase, the annual dividend will be $0.76 per share, which at the current market price of $21.62 per share represents a 3.52% yield. This is well above the yield of the S&P 500 index (NYSEARCA:SPY), which is just under 2%.
Along with yield, dividend growth is equally as important. GE's dividend has increased from $0.42 annually in 2010 to $0.76 annually in 2013 (assuming the dividend isn't raised again in 2013). Dividend growth was 38% in 2011, 17% in 2012, and now 12% in 2013.
There are two ways in which dividends can increase: by increasing earnings and by increasing the payout ratio. The average analyst estimate for 5-year earnings growth for GE is just over 11%. How accurate this ends up being remains to be seen, but the good news is that GE's current payout ratio allows for dividend expansion without significant earnings growth. To calculate the payout ratio, I'll use free cash flow instead of earnings. In 2010, the payout ratio was just 12.88%, rising to 22.04% in 2011. So far in 2012 FCF is behind where it was in 2011 at this time, so we may see a spike in the payout ratio this year. But there's still room to grow on that front.
How Much Is GE Worth?
For an investor focused mainly on dividends, valuing a company using the Dividend Discount Model makes sense. This method values the company based solely on the value of all future dividend payments discounted back to today. This is similar to the Discounted Cash Flow method, except here the cash flows are simply the dividends. I'll assume that the dividend will grow by 10% next year (by the end of 2013) and allow that rate to decay over 20 years to a perpetual dividend growth rate of 3%. Given the growth in the past few years and the low payout ratio, these estimates appear reasonable, and are actually more conservative than my previous article on GE. I like to use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. Using these parameters, I estimate the fair-value of a share of GE to be $25.81.
This is a rough estimate (as all valuation calculations are), but what we can say is that a price below about $25 per share is a great deal for a dividend investor.
With a share of GE currently trading at $21.62, a 16% discount to my fair value estimate, the recent dividend increase further cements GE's status as a fantastic dividend stock. What you get with GE is a 3.5% dividend yield and a double-digit dividend growth rate. There aren't too many stocks out there with better dividend characteristics.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.