By: Ahmed Ishtiaq
General Electric (GE) is making solid progress to strengthen its business and rectify the errors made in the past. The stock had a relatively flat year with small movements. However, in mid-September, the stock went above $23. This was the highest GE stock had gone since the financial crisis of 2008. At the moment, the stock is trading at $20.82 and has been able to remain above $20 since mid-July. One of the biggest mistakes was the decision to move away from its strength, and invest itself heavily in financial services. However, the company is trying to re-balance its portfolio, and currently the focus is on the industrial arm of the conglomerate.
I believe the steps to re-balance the portfolio will start to bear fruit soon and 2013 will be an important year for the company. Recently, GE has been making moves in the market, which I would like to briefly discuss here. Furthermore, GE is one of the best dividend paying stocks in the market. I will also take a look at the dividends and payout of the company.
GE has been paying dividends for more than a hundred years, and it is one of the most consistent dividend payers in the market. In 2009, the company had to cut its quarterly dividend from $0.31 per share to $0.10 per share. However, since then, the company has raised its dividend five times and currently pays quarterly dividend of $0.19 per share. The most recent dividend increase came in the current month when the company announced a 12% increase in its quarterly dividend payments.
In addition, the GE board has reiterated that the company plans to buy-back all the shares it issued in 2008. At the moment, GE pays an annual dividend of $0.76 per share, yielding 3.65%. The company has paid $7 billion in cash dividends during the past twelve months, and generated more than $15 billion in free cash flows. The payout ratio based on free cash flows is less than 50% for GE, which gives it substantial room to increase its dividends in future.
GE has been making significant moves recently. Although GE Capital has come out of its slump, the company has realized that it needs to focus more on its core strength. Industrial arm of the company is getting new orders of significant value. At the start of December, GE received an order of 40 Bombardier Aerospace CRJ900 regional airplanes powered by CF34 engines made by GE Aviation from Delta Air Lines Inc (DAL). The company has an option of buying 30 additional aircraft. The order value is about $320 million, excluding the 30 additional aircraft. Furthermore, GE aviation Services announced that it will lease four new Boeing 777-300ERs to China Airlines.
However, the biggest movement by GE is the acquisition of the aviation business of Avio S.P.A for $4.3 billion. The price paid represents an EBITDA multiple of 8.5 and the acquisition will likely add around $2.5 billion to revenues. Some of my fellow Seeking Alpha authors have explained the valuation and future prospects of the acquisition. However, no-one has explained how the supply chain of the company will improve and how the synergies will be realized. Strengthening of the supply chain and synergies are the main motives behind the acquisition. Avio has been working with GE for the past two decades, and it is an important supplier for GE. The acquisition will give GE increased control over the manufacturing capacity. The acquisition represents vertical integration for the company. At the moment, the demand for engines is extremely high; the Avio acquisition eliminates one level of the supply chain and gives GE direct control over the production process. Sometimes working with a supplier creates a problem with intellectual property. Although it was not the case here, GE has eliminated the potential for abuse of its intellectual property. Furthermore, better control over the production process will help the company manage its demand and supply and bring substantial synergies.
The aviation sector is contributing heavily to GE, and the company is trying to increase its foothold in the market. I believe the recent movements by the company are spot on and will generate substantial revenue streams in the near future. I expect GE to show significant growth during 2013 and start its journey back to the levels before the financial meltdown of 2008. Future growth prospects and an attractive dividend yield make it a buy for me. I believe over the coming year, GE will reward its investors with substantial returns.