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General Electric (GE) is a diversified manufacturer with four main divisions: Energy, Technology Infrastructure, GE Capital, and GE Home and Business Solutions. In 2011 total revenue was just shy of $150 billion.

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The stock plummeted in 2008 and has since been slowly recovering. In the third quarter of 2009 the divided was slashed by 67%. The stock currently trades at $18.88 with a projected dividend yield of 3.6%. Below is the ten-year dividend history.

YearDividendGrowth
2002$0.7212.5%
2003$0.765.56%
2004$0.85.26%
2005$0.8810.00%
2006$1.0013.64%
2007$1.1212.00%
2008$1.2410.71%
2009$0.82-33.87%
2010$0.42-48.78%
2011$0.5838.10%

The quarterly dividend this year was raised to $0.17, so the dividend for 2012 should be at least $0.68, at 17.24% increase from 2011. I'll calculate the payout ratio as a percentage of free cash flow. The results are shown below.

YearFree Cash Flow (Mil $)Float (Mil Shares)Payout Ratio
2002$16,1376,24127.85%
2003$20,5227,28626.98%
2004$23,3667,61426.07%
2005$23,2007,41128.11%
2006$13,9967,27451.97%
2007$27,8136,93927.94%
2008$32,5916,75025.68%
2009$15,9597,04536.20%
2010$26,3238,07412.88%
2011$20,7097,87022.04%

Other than a few outlier years the payout ratio hovers between 25-30%, which is fairly low. This should allow the dividend to be well supported.

Valuation

I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. I will assume that the dividend will grow by 11.55% in 2013, and then let that growth rate decay over 20 years to a perpetual growth rate of 3%, as per the growth table below.

YearDividend Growth Rate
201217.24%*
201311.55%
201411.10%
201510.65%
201610.20%
20179.75%
20189.30%
20198.85%
20208.40%
20217.95%
20227.50%
20237.05%
20246.60%
20256.15%
20265.70%
20275.25%
20284.80%
20294.35%
20303.90%
20313.45%

*Dividend increase already announced

For reference, the average analyst estimate for earnings growth for the next five years is 12.43%. Using these parameters I arrive at an estimated fair value of $26.96 for a share of General Electric.

Conclusion

With GE currently trading at $18.88, nearly a 30% discount to my fair value estimate, it would appear that General Electric's dividend is a bargain. With a low payout ratio and high yield GE looks like a good stock to add to a dividend-focused portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: General Electric's Dividend Is A Bargain