With interest rates at an all-time low, more and more people are looking for high-quality dividend payers, such as General Electric Company (GE). With its 3.3% dividend, GE has been a very popular stock in recent times. In this article, I will be looking at the sustainability and expected growth of this dividend. I will also be judging GE's current valuation.
(Picture from Google Finance)
Since the beginning of this year, GE's price tag has gone from $20.99 to $23.08; an increase of 10%. This has caused its price-to-earnings ratio to reach 16.9, which is far above the 5-year average of 13.9 and only just below the 10-year average, which is at 17.1.
Between 2003 and 2006, the p/e ratio was even higher than it is today. Back then however, GE was growing its earnings at a far higher pace, as can be seen in the graph below.
Average analyst expectations for GE's earnings per share are $1.67 for 2013 and $1.85 for 2014. Considering the fact GE usually pays out around 50% of its earnings per share as dividends, we could expect to see the dividend reach $0.92 by next year. At the current price of $23.08, this would give us a yield on cost of 4%.
(Picture from Yahoo Finance)(click to enlarge)
Speaking of dividends, GE has paid its shareholders regularly for over a century. Unfortunately, lower earnings led to the dividend being reduced in 2009, to $0.64, and then further reduced in 2010, to $0.46. Since then however, it has been going up again.
In 2012, GE purchased over $5 billion of its own stock, which seems like a lot. However, with a market cap of close to a quarter of a trillion dollars, $5 billion doesn't really make all that big a change.
Now, we've seen a lot of positive and less than positive points, now it's time to sum them all up and determine whether or not we should buy GE.
I like the expected growth in earnings, and the high dividend yield GE has, but at a price close to its 52-week high, GE seems to be overvalued. You'll notice I've listed stock repurchases as a negative point. At a price-to-earnings ratio that's at its highest point since 2007, I believe GE shouldn't buy back any more shares. I will be waiting for the first and second quarter results to come out, and if they indicate that GE will meet or go above analyst expectations, I will consider buying some shares.
I'd love to hear your opinion on GE. Feel free to leave a comment below!