In the annual letter to shareholders, General Electric (NYSE:GE) CEO Jeff Immelt discussed his plans for capital allocation to shareholders in the future. He pointed out that GE has paid $106 billion in dividends since 2000, second only to Shell (NYSE:RDS.A). While this is an impressive feat, had it not been for the financial crisis, which saw GE cut its dividend by roughly two-thirds in the face of massive uncertainty in the credit markets, GE likely would have been number one. This is great but during the same time period, the stock has largely lost value for shareholders, dropping from over $40 pre-crisis to $23 where it trades today. Since Immelt knows the days of GE's rapid growth have been behind it for years (or decades) and he wants to provide a return to shareholders, he stated that GE has "$100 billion for allocation over the next few years" to dividend payouts. Investors must now ask themselves if the shares are worth holding, given the lack of capital appreciation but the promise of substantial dividends.
First, $100 billion is an enormous number, so it would be instructive to understand this number in the context of the current GE payout. Last year, GE paid out $7.2 billion in dividend payments. Payouts for 2010 and 2011 were $4.8 billion and $6.5 billion, respectively. If we take the $100 billion number Immelt threw out in the shareholders' letter, we can assume it will take roughly 14 years at the current payout to meet his stated goal of $100 billion in dividend payouts. The other part of his statement was "the next few years." I'm not sure about you, but 14 years is not the next few years. What we can then infer from this bit of information is that Immelt is planning on increasing the dividend payout that GE makes substantially. If he doesn't, he won't meet his stated goal of "a few years," so I think it's fair to expect that GE has plans to not only increase its payout, but considerably so.
Given that Immelt has tipped his hand in terms of an increased dividend, how much could GE actually afford? The short answer is, a lot. GE produced operating cash flows of greater than $30 billion in each of the past three years and it produces more from investing activities as well. The only reason GE hasn't been stockpiling an enormous amount of cash at the end of each year is its mission to pay down existing debt, which has totaled roughly $120 billion in the past three years alone. Given that Immelt says the cash will come from operations and dispositions, I'd say GE can virtually pay any dividend it likes as it has proven the ability to generate an enormous amount of cash each year sustainably.
Immelt says $100 billion will be paid in a few years; to me, a few years is four or five but let's stretch it to seven years, to be conservative. If GE spends $100 billion in dividend payments over the next seven years, that is an average of $14.3 billion per year. Keep in mind that GE's current payout is roughly half of this amount. Therefore, we can conclude that GE is "committing" to virtually doubling its payout at a bare minimum in order to meet its goal outlined in the shareholders' letter. While this may sound crazy, given the amount of cash GE generates, it is more than plausible for the Board to eventually double the dividend payment. If Immelt wants to meet his goal of $100 billion in "a few years," however, he will need to start quickly as the current payout is only half of what is needed.
Just in case you were wondering if the $100 billion includes stock repurchases as well, even if we factor in the 400 million shares that would be potentially repurchased to reach Immelt's goal of less than 10 billion shares outstanding, we are only talking about $9.2 billion spent on repurchases, leaving $90.8 billion for dividends. This would still almost double GE's current payout if the $90.8 billion is paid out over the next seven years ($13 billion annually).
Whatever you think about GE's business, it's CEO, etc, doubling an already robust payout is a terrific catalyst for any stock and can serve as a floor in rougher times. If GE actually manages to pay out $100 billion over the next few years, shares would either be yielding north of 6% or, more likely, the stock price will appreciate to bring the yield back in line with historical norms. You can do the math yourself, but in order to maintain its current yield of 3.3% if the $90.8 billion conservative estimate is paid out over seven years, GE's share price would need to appreciate to $41.50, or up 80% from here. Clearly, Immelt has your back as a GE shareholder and assuming we can avoid the kind of economic calamity that we witnessed in 2008, GE shareholders appear to be in line for some handsome payouts in the coming years.
In addition, if you are so inclined, you could sell call options against your long position in GE to generate your own extra "dividends" throughout the year. With earnings coming up later this month and the stock trading near multi-year highs, I would be cautious about the near-term upside on the stock. As a result, you could sell the June 23 call for a $0.70 premium with the stock trading at $22.96. This option is at the money and offers just over a 3% absolute return on the call in three months while protecting your downside risk in the stock to about $22.25, exclusive of commissions. If GE does sell off three percent, you are protected. If GE continues upward, you are guaranteed to make the 3% on the call you sold. You could repeat this trade each time the short calls expire or your shares are called away in order to generate your own income, regardless of whether or not Immelt follows through on his promise.
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.