On Friday, Oct. 19, before the markets opened, General Electric (GE) reported third-quarter revenue below the average Wall Street analysts' estimates. The cause of this revenue miss appears to be due to softening demand for healthcare equipment and jet engines from a weakening global economy. Foreign exchange rates also worked against GE, compounding the effect declining demand had on revenue.
GE's revenues for Q3 were $36.3 billion, which is 3% growth from Q3 2012, but 1.63% below the average estimates of $36.9 billion. Both aviation and healthcare sales each declined 1% from Q3 2011. Despite this revenue miss and possible lowered revenue guidance going forward, GE maintained its prior outlook for earnings growth. Although revenue from GE Capital fell 5.4% to $11.37 billion, its profit rose 11% to $1.68 billion, and this too is an apparent cause of this revenue miss that did not hit the EPS expectations.
Industrial profit climbed 11% to $3.57 billion and generated $24.8 billion of sales, or roughly two-thirds of GE's total revenue. Adjusted earnings from continuing operations increased by 10% to $3.8 billion, or $0.36 per share, which was in line with Wall Street expectations. Net income (including pension costs) increased by nearly 50% to $3.49 billion, or $0.33 per share, from $2.34 billion, or $0.22 in Q3 2011.
At the start of Q4, or the start of this month, General Electric sold $7 billion of bonds at an average yield of 2.58%, which is roughly 10% below the average rate paid by domestic investment-grade issuers. The company will use the funds to satisfy already existing debt at higher rates. The low rate can be seen as a sign the bond markets welcome GE debt. The company will likely issue more bonds in the coming quarters, as more existing debt obligations come due. This should be comforting to management and shareholders, especially considering that GE is capable of borrowing for 10 years at a rate below its present 3% yield on shares.
Though General Electric was not a dog in 2011, it entered 2012 with the fourth-highest dividend among the 30 companies in the Dow Jones Industrial Average. Through the first three quarters of 2012, GE is the best-performing dog, having appreciated by about 28%, and its yield is now the 13th highest. After reducing its quarterly dividend in 2009, from $0.31 to $0.10, the company increased its dividend to $0.12 in 2010 and raised it twice in 2011 to its current rate of $0.17 per quarter.
GE may not be a dog in 2013 as there is some competition among Dow constituents with a dividend of about 3%. Chevron (CVX), for example, has a dividend of over 3%, and Microsoft (MSFT) announced a 15% dividend increase two weeks ago, from $0.20 to $0.23 per quarter, placing MSFT's yield above 3.1%. Another tech contender is Hewlett-Packard (HPQ), which raised its dividend in the first half of 2012 and lost one-third of its value through the first three quarters of 2012. HPQ's dividend increase and equity losses have combined to result in a yield of about 3%. Any of these companies could secure a position with the 2013 dogs with the right dividend increase or a sell-off, and possibly both.
General Electric increased its dividend in Q4 of each of the last two years, making it appear as if GE is reasonably likely to marginally increase its dividend before the end of 2012. This is no certainty, but GE has attempted to aggressively reinstate its dividend since slashing it, and has grown its quarterly dividend by 70% in the last two years. Given GE's ability to borrow so cheaply and the fact that it met earnings expectations, it appears this revenue miss will not stop GE from declaring a dividend increase before the end of the year.
Disclosure: I am long GE.