General Electric Presents a Dividend Opportunity

This article originally appeared on The DIV-Net on July 16, 2008.

Diversified conglomerate General Electric (GE) announced its second quarter earnings this past Friday. According to GE's finance unit, GE money's profits fell 9% while the consensus estimate was for profits in that unit to drop 15-20%. Its Infrastructure unit's earnings, on the other hand, were up 24%. Overall, the company met expectations by posting nearly flat earnings growth over the same quarter in 2007. Revenue actually rose 11% to $46.9 billion.

GE's shares were hit hard last quarter when the company surprised the market by announcing an unexpected drop in earnings due to weak credit markets. In this most recent earnings release, GE affirmed its full year earnings forecast of $2.20-$2.30 per share. This is barely above its 2007 earnings per share of $2.20. With plans to spin off its industrial and appliance units, and forecasting further lower profit from its finance segments, GE's earnings growth looks stagnant for the short term.

Here are a few points to ponder with respect to GE as a potential long-term dividend growing investment:

• GE's current dividend pay out ratio is about 52% (the company is paying out half of its earnings).
• The current yield on the stock is around 4.5%.
• GE has grown earnings per share in eight of the last nine years.
• Its dividend growth has swift, consistent, and has stood the test of time.
• Global infrastructure, alternative energy, and emerging economies are great areas to be a leader in long term and GE is there with bells on.
• GE is already deriving about 50% of revenue from outside of the U.S.

The company currently has its hands in lots of cookie jars. The main focus of management is to get its hands out of the cookie jars that are growing slower and keep searching for cookies in the faster growing jars.

As of writing this GE, shares were off about 25% year to date, and it's not a purely financial company. Yes, GE has some financial exposure but one of the scary things about investing in financials, for a dividend growth investor, is the possibility of dividend cuts. Since GE has a pay out ratio of about 52%, and minimal exposure to finance as compared to, say a bank, the dividend is not at risk because their other divisions’ profits are looking pretty solid. This is a key point because as mentioned GE is now yielding about 4.5%, and probably has a bright future, even without light bulbs. A 'yield on cost' of 4.5% with solid growth potential is a great starting point for a position in this company.

Disclosure: None

Comments

[epeon]

here is a question: As GE trys to be a financial player, one has to wonder if this makes sense? I mean, Welch put all that money into insurance and he made big bucks. But, it turns out he didn't reserve enough and Imhelt has to write it off. So, did Insurance every make any money? One has to wonder if GE is being a little arrogant when it thinks it knows more about that business then those that were in it.

Likewise all these loans. Is GE smarter then bankers (an admittedly low threshold) who are in this business 100%? Or, are we going to have profits that vanish into a maze of writedowns?

What makes money for GE is the infrastructure (i.e. big turbines, jet engines, and the stuff around them). Maybe GE ought to focus on its core business?

[ajhough]

I have owned GE more many years. I have received two or three splits, added to my position at various times and retain it as a core in my portfolio. It has an understandable and reasonable business plan, executes it very well, and has seen its multiple contract over the past ten or twelve years. I find it a good growth asset and can continually accumulate it in reasonable periods.

[User 118015]

I'm a new investor and believe that the company has a excellent mix going forward...big energy requirements on a world wide basis and GE seems to be right there on the job!! PS the div is nice too....Marvin

[svosavvy]

Marvin,

You picked a great time to start, this stock hasn't been this attractively priced in years. With all the bad news baked in this still should be trading at $32 in my opinion. Nice dividend, and a big vote of confidence from abu dhabi. As I understand from a news release, mubadala (?spelling) a firm belonging to abu dhabi has basically stated they are actively going to try to become one of ge's top ten institutional holders of stock.

[moneygardener]

GE is a stock you buy and put away. The dividend is solid and they are targeting all of the right global trends.

[George Edwards]

It is not just a solid dividend: The dividend represents solid growth. We bought GE several years ago when it was yielding about 2.5% on the current price. Now, with dividend increases, we are getting 15% yield on our original purchase price. Show me a bond that will do that for retirees.

[324018663]

I used to work for GE Money Asia. They are headed the right direction, and are more strategically sound than local competitors. While not as mature than finance giants like Citi or HSBC, GE Money stands a good chance of winning in developing markets. And focusing on developing markets in GE's main theme lately.

[Emerald]

GE is basically a finance company. Want to buy one now? Return has been lackluster with high risk in "financial products".

[rhj123]

Buying into any stock for a dividend of lass than the rate of inflation is not a great idea. However, if that stock actually grows in a good manner, the gain can cover for the low dividend. If dividends are primary, there are plenty available at more than 8%.

[Frankie62]

I am in the GE DRIP through a previous employer which was sold by GE when it didn't live up to GE expectations. This is one thing which GE does particularly well - divesting divisions which don't perform well enough. I have recently bought more GE because the dividend rate is higher than any CD you can buy, and there is expectation of increase in share price - since the price is now so low. With so much of its earnings coming from outside the US, the value of the US$ also helps. And I trust GE Capital (Financial) is much better at risk management than most US banks.