GE: Dividend Increases Back on Track and Growing at a Rapid Pace

Jun.12.11 | About: General Electric (GE)

In the years from 2003 to 2007 investors were steady purchasers of General Electric (NYSE:GE) shares whenever the yield exceeded 3%. Steady increases in payments each year permitted the continuation of buying additional shares even at higher and higher prices. Then the financial crisis developed and GE was forced to cut the dividend from 31 cents per share to 10 cents beginning with the June 2009 quarter.

The 10 cent dividend was paid for the next 5 quarters before GE raised the dividend to 12 cents payable in the September 2010 quarter. That dividend was paid for only one quarter when it was raised again to 14 cents payable beginning in the December 2010 quarter. GE once again increased it to 15 cents in April of this year. Since the original cut in payments in 2009 it has now been increased by 50% to the current level.

General Electric has paid a dividend every quarter since 1899, including a period of 32 consecutive increases from 1976 to 2007. Many income investors establish trading rules only permitting investment in companies in which the dividend has increased for a certain number of years, rarely less than 5, and most often 10 or more. Understandably, selecting dividend stocks with a long history of dividend payments and annual increases is a very reliable method of stock selection. General Electric was such a stock in 2007.

Many will say that rules are made to be broken. In the case of General Electric, I view the situation as a rule-breaker. Management and the board appear to be quite serious in raising the dividend back to previous levels. With earnings projected to reach $1.36 in 2011 and $1.66 in 2012, a 22% increase, the future growth of additional increases seem assured.

Before the financial crisis forced the dividend cut at General Electric, most investors were quite happy with a 3% yield with annual increases. With three rate increases over the past two years, GE seems determined to restore the dividend to higher levels. History also point to 50% payout ratios. The following table shows the previous history of the dividend payout ratio prior to the cut.

Year Payout Ratio
2001 47%
2002 48%
2003 50%
2004 52%
2005 53%
2006 52%
2007 52$
2008 70%
Click to enlarge

Recent history shows that GE's payout ratio is approximately 50%. If we project earnings for the next several years using past history for future payments we arrive at estimated payments and yield. The following table illustrates what the future may hold:

Year Estimated Payout Estimated Earnings Estimated Dividend Yield on current price of $18.30
2011 50% $1.36 $0.68 3.7%
2012 50% $1.63 $0.81 4.4%
2013 50% $1.98 $0.99 5.4%
Click to enlarge

Conclusion and rational:

General Electric was formed with a merger of Edison General Electric Company and Thomson-Houston Electric Company in 1892. GE is the only company listed in the Dow Jones Industrial Index today that was also included in the original index in 1896. It is my belief that with such a history, the management of this company will accept nothing less than full restoration of its dividend.

Over the last few weeks the shares have corrected 14% from a recent high of $21.50 down to $18.30. GE, in my opinion, will not only increase the dividend at a rapid rate, but will restore it to its former level as soon as possible. This represents a double opportunity owning a company with a good current yield growing at a fast pace. For one not long or one adding to a current position this is a good buying opportunity.

Disclosure: I am long GE.