General Electric (GE) is a conglomerate with operations in diverse fields such as aviation, finance, power systems and health care. The thesis of this article is an options play to take advantage of the company's upcoming earnings announcement.
GE's performance has been severely hampered by its financial arm GE Capital since 2008. Management has been diligently working to improve the balance sheet held by GE Capital:
"And from a GE Capital standpoint, competitive position is stronger. We've got excellence and originations in asset management. We've got a ton of liquidity. We expect to start the dividend and restart the dividend in 2012. The margins are expanding, and we think we're kind of coming through the cycle a better financial service business that we went in, and with a stronger hand." (Source Jeffrey Immelt from the Annual GE Outlook Meeting December 13, 2011 3:00 PM ET).
The Fed recently released the results of a recent stress test. The results where satisfactory enough for the Fed to allow major banking concerns such as JP Morgan (JPM) to initiate a dividend hike and to buy back shares of their equity.
GE, which passed the test, held off on making any new announcement, even though the CEO is on record as saying that he expects to restart the dividend from GE Capital. I am of the opinion that GE will announce a major dividend hike when it reports its earnings in April. I have identified an options play to speculate on an equity bump if the company does indeed announce a dividend hike.
GE May12 20 Call
GE May 20 strike Call
Option info provided by OptionsXpress. Share information provided by Schwab.com.
First Quarter Earnings Announcement Expected: GE has confirmed that earnings will be announced 04/20/2012. With 12 analysts covering GE, the consensus EPS estimate is $0.33, and the high and low estimates are $0.35 and $0.32, respectively.
$19.71 - $19.97
52 Week range
$14.02 - $21.00
Avg. Volume (10 Day)
Put/Call Ratio (1 Day)
Put/Call Ratio (30 Day)
Earnings TTM (GAAP)
Earnings per Share (01/20/2012)
Quarterly Div. (Ann. Yield)
Feb 23, 2012
Next Pay Date
Apr 25, 2012
I have decided to highlight the May 20 call for this trade. I choose the May strike to allow the story ample time to play out. For the trade to become profitable, a roughly 3% move above 20 is required. If a large dividend hike is announced, a 3% move is not unreasonable and the trade will become profitable.
The major risk to the trade is for GE to have a poor earnings report and to forgo a dividend hike. This scenario is not out of the realm of possibility, hence this trade is a pure speculation. The possibility exists for substantial if not total loss, if the scenario doesn't play out as expected.
Additional disclosure: I am also long the GE May 20 calls. This article is for informational purposes only. Caution should be used when trading options due to the potential for substantial loss. Thanks for reading and I look forward to your comments.