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.
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|
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.
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|
*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.
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.