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.

Click to enlarge.

Click to enlarge

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%
Click to enlarge

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%
Click to enlarge

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%
Click to enlarge

*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.