General Electric's Dividend Is A Bargain

| About: General Electric (GE)

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.

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