A few days ago, there was good news for investors in General Electric (GE) when the finance arm of the company GE Capital won the approval of the regulators to return some of its profit to its parent. The move came ahead of the expectation of many analysts who thought that there would be no approval until 2013 and that even this would depend on the number of uncertain variable factors. Now there is reason for GE investors to hope that the stock buybacks will be speeded up and the dividend will be raised. The finance arm had emerged as a concern for many investors during the financial crisis and led the company to reduce its dependence on the finance arm and pay more attention to the industrial activity which is its core.
Now that the Fed has confidence in the financial position of GE Capital, a special dividend of $4.5 billion is planned for later this year. Analysts point out that this removes a large cloud that has hung over GE and will awake new interest in income investors. GE has traditionally received a dividend from its finance arm of the practice was discontinued following the financial crisis in the fourth quarter of 2008. Now the board of GE Capital has declared a dividend of $475 million which is 30% of its first-quarter earnings in advance of the special dividend. The GE board will consider its next move is on dividends in December. GE Capital dividend payments are planned at 30% of earnings for the year 2012 and GE itself plans to return 45% of its profit to shareholders as a dividend.
GE Capital was a major contributor to GE's profits in the past, offering financial products such as loans and leases, but it has recently been a drag on the parent. Now that it is once again contributing cash to its parent, the parent will have more resources for its own dividend which now offers a handsome dividend yield of well over 3%. GE is a capital intensive company and requires plenty of cash for its own dividends and a share repurchase program of $12 billion. In addition, GE is back to its acquisition strategy with its planned purchase of Industrea, an Australian manufacturer of mining equipment, for nearly $470 million. In the year 2011, GE spent around $11 billion in acquisitions related to the energy industry. Finance and energy account for nearly 70% of the company's revenues and it is still vulnerable to the slowdown in energy spending caused by economic weakness as well as shocks to the financial system such as the crisis in the Eurozone.
The proposed acquisition of Australia-based Industrea and Virginia-based Fairchild is a fair indication of GE' s interest in the mining machinery market. This is a good move on the part of the company provided it can deal with the competition. Mining is globally a $60 billion industry and definitely has high potential. You just have to look at some of the major mining equipment manufacturers to see how well they have been doing lately. Joy Global's (JOY) first-quarter sales grew by 21% on higher shipments while Caterpillar (CAT) has reported a jump of over 70% in sales for the first quarter in its mining business. Komatsu, another giant in the industry, expects record sales this year on the back of strong demand. So robust is demand that Caterpillar is reported to have quoted delivery dates extending into the year 2014 for some of its equipment.
Industrea, for which GE will pay $700 million, has a strong foothold into one of the hottest mining areas in the world which is China. China is both the biggest producer and the biggest consumer of coal in the world and plans to increase coal production from 3.5 billion tonnes last year to 3.9 billion tonnes in 2015. However the opposition is not sitting on its hands. Joy is working towards strengthening its position in China with judicious acquisitions and Caterpillar has continued to be aggressive particularly with its acquisition of Bucyrus International. However GEs acquisitions should provide it with a firm platform from which to push for growth.
GE has just announced that it is going to open a new research and development center in China to help the company to build stronger relationships with Asian customers. This will be the second R&D centre in the country and clearly marks the emerging markets as GEs new hope for sales growth. The company is expecting to see double digit growth for the next few years in these markets. The initial focus of the new centre is going to be medical, energy telecommunication and transportation. Later on, other industries are expected to be added. GE has recently paid out $535 million to buy a 15% share in XD Electric after two years of negotiation. The deal also envisages that the two companies will set up their own joint-venture company in China in which GE will take a 40% stake. The presence of that the GE is going to build will give them a major advantage over their competitors.
In my opinion, there are many compelling reasons to invest in GE right now. It is an attractive income investment with a dividend yield of around 3.5% and there is every prospect of a substantial increase this year. GE has over $80 billion in cash and equivalents and this cash mountain should be enough to service dividends for many years. In addition, there is a free yearly cash flow of over $40 billion. The return of GE Capital to financial health and the company's moves in areas such as mining equipment augurs well for the future and should enable them to take advantage of developing markets where the growth is. I would have no hesitation in recommending GE as a long-term buy as it will surely return to its "bluest of blue chips" status. Hang on to your existing holding and you are bound to be rewarded by the dividend yield as well as capital appreciation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.