It appears to me General Electric (NYSE:GE), the multinational and well-diversified conglomerate company similar to Siemens AG (SI), is on the verge of regaining its defining moments again. In its annual letter to shareowners released recently and titled "A Real Opportunity for Change Is Here," Jeff Immelt, the CEO of GE, outlined the company's plan to improve shareholder value via future allocation of capital largely in the form of dividends to shareowners. Looking at the historical records of GE, a company once dubbed as the most valuable conglomerate in the world, any such promise should be taken with all seriousness.
GE maintained a good track record of dividend payouts for several years except during the period of financial meltdown, when the company reduced its dividend by almost two-thirds, prompted largely by the uncertainty in credit markets at that time. From 2000 to date, GE has paid out $106 billion in dividends. That record placed GE as one of the topmost companies on the dividend table and second only to Shell (NYSE:RDS.A), obviously due to the cut in its dividends during the financial crisis. In the annual letter, CEO Immelt pointed out that GE is planning to allocate over a $100 billion to shareholders in the "next few years" in dividend payouts, which might possibly span the next four to eight years.
To be frank, GE lost value for many shareholders who held the stock when it was over $40 prior to the financial crisis, and who are still holding the stock now that it has plummeted to about $23. You now need to determine if buying more of GE is the right thing to do at this time, when there is the possibility of earning more via increased dividends promised by the CEO.
How feasible is this promise of substantial dividend payouts in the "next few years"?
Currently, the average dividend payout to shareholders by GE per year stands at about $7 billion. If CEO Immelt has promised to distribute over a $100 billion in the next few years, that means the company will have to increase its dividend payouts to about $12.5 billion per year from the current figure, taking "the next few years" to be a maximum of eight. That idea sounds weird, but if we remember that GE is a cash cow, then $12.5 billion payouts per year in dividends appears achievable. CEO Immelt and his team would have to commit the company to more than doubling the dividend payouts of GE from the next quarter.
What to expect if the promise of substantial dividends payouts materialized!
Irrespective of anybody's thoughts about GE and its business outlook under the current CEO, if the payout turns out to be double the current dividend payout in the next few years then the stock needs no other impetus to gain in prices and start regaining high yields.
GE is currently in the news for various juicy business deals. Its Power Conversion unit has recently landed a contract worth over $600 million in Brazil. GE will be supplying Brazil's ambitious rig-building pre-salt oil program with propulsion, vessel automation, dynamic positioning, and drill systems. Also, recently, Comcast (NASDAQ:CMCSA) announced its decision to own outright NBC Universal, a unit of GE sold last year, via purchase of the remaining shares a year ahead of schedule. That means GE will yield a cash payment of about $15-$20 billion one year ahead of the originally planned schedule of incremental purchase of the remaining shares.
With a cash stockpile of about $125 billion early this year, this additional cash payment to GE by Comcast will swell its cash reserve to about $200 billion if you factor in almost $50 billion cash from its regular operations for 2013. There is no doubt that Chairman/CEO Immelt got his calculation right when he promised to add value to shareholders in excess of $100 billion in the next few years. You may now ask yourself if GE is worth holding right now or if it's the right time to buy more shares and improve your lot in the near future.