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.
| Year | Dividend | Growth |
|---|---|---|
| 2002 | $0.72 | 12.5% |
| 2003 | $0.76 | 5.56% |
| 2004 | $0.8 | 5.26% |
| 2005 | $0.88 | 10.00% |
| 2006 | $1.00 | 13.64% |
| 2007 | $1.12 | 12.00% |
| 2008 | $1.24 | 10.71% |
| 2009 | $0.82 | -33.87% |
| 2010 | $0.42 | -48.78% |
| 2011 | $0.58 | 38.10% |
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.
| Year | Free Cash Flow (Mil $) | Float (Mil Shares) | Payout Ratio |
|---|---|---|---|
| 2002 | $16,137 | 6,241 | 27.85% |
| 2003 | $20,522 | 7,286 | 26.98% |
| 2004 | $23,366 | 7,614 | 26.07% |
| 2005 | $23,200 | 7,411 | 28.11% |
| 2006 | $13,996 | 7,274 | 51.97% |
| 2007 | $27,813 | 6,939 | 27.94% |
| 2008 | $32,591 | 6,750 | 25.68% |
| 2009 | $15,959 | 7,045 | 36.20% |
| 2010 | $26,323 | 8,074 | 12.88% |
| 2011 | $20,709 | 7,870 | 22.04% |
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.
| Year | Dividend Growth Rate |
|---|---|
| 2012 | 17.24%* |
| 2013 | 11.55% |
| 2014 | 11.10% |
| 2015 | 10.65% |
| 2016 | 10.20% |
| 2017 | 9.75% |
| 2018 | 9.30% |
| 2019 | 8.85% |
| 2020 | 8.40% |
| 2021 | 7.95% |
| 2022 | 7.50% |
| 2023 | 7.05% |
| 2024 | 6.60% |
| 2025 | 6.15% |
| 2026 | 5.70% |
| 2027 | 5.25% |
| 2028 | 4.80% |
| 2029 | 4.35% |
| 2030 | 3.90% |
| 2031 | 3.45% |
*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.
