One of the bigger stories of the year was GE Capital's announcement that it would begin paying a dividend to its parent company General Electric (GE). This is a great sign that GE Capital, the company's finance arm, has put the financial crisis behind it and is not only healthy, but apparently strong. Anytime you have cash to spare it's a sign of strength. GE Capital will pay a special dividend of $4.5 billion this year and fork over a $475 million quarterly. GE Capital, which offers loans, leases and financing, was a hot profit engine in the years leading up to the financial crisis, but it quickly turned into a drag when the economy slowed and the financial system nearly collapsed. Now that the business is making money again and returning a healthy dividend to its parent, GE will have more resources to put toward its own dividend, which is currently yielding a nice 3.2%, share repurchases and acquisitions. This is just part of the reason that GE is bound to see bright days going forward and any investor would do well to buy GE.
Not only does the resumption of dividend payments from GE Capital to GE mark a definitive end to the financial woes stemming from the financial crisis for GE it also means additional cash for the company. Capital-intensive companies like GE can never have enough cash, so getting the finance division's dividend payment turned on again is welcome news, indeed. GE needs cash not only for its generous dividend and $12 billion share-repurchase program, it also needs the money for the big deals it has been doing and can expect to into the next year or two. GE recently formed GE Mining, with the purpose of providing power solutions, water management, and productivity solutions at mining sites. This formation came on the heels of GE acquiring two mining companies - Australian-based Industrea, and Virginia-based Fairchild International. I expect GE to continue to focus on this sector and see increased revenue and profits. Right now GE is making around $2 billion in the sector. Expect that figure to more than double in the next 12 to 18 months.
I expect GE Mining to follow a similar track as GE followed in expanding its energy holdings. In 2011 alone, GE plowed $11 billion into acquisitions in the energy industry. GE bought several small priced companies in expanding further in the energy sector and these acquisitions have paid off as growth and revenue saw solid increases this past year. The company announced further investments in its battery manufacturing arm and a new business names GE Energy Storage. This business is taking advantage of GE's leadership in new battery technology. This technology produces batteries half the size of conventional lead batteries but last 10 times as long. GE Energy Storage is expected to add another $1 billion in revenue for GE. Expect similar, if not better, results stemming from GE's acquisitions in the mining sector.
GE is furthering its stake in alternative and green energy as well. GE Energy Financial Services division recently announced the commitment of approximately $156 million in common equity for one of Minnesota's largest wind farms, which employs GE turbines. The move is part of the company's expansion of its partnership with the global renewable energy firm Enel Green Power. The GE division now owns 51 percent of the 200-megawatt Prairie Rose wind project which is under construction in southern Minnesota near Hardwick, northwest of Luverne, and is expected to cost about $305 million.
More positive news shares look cheap on a forward earnings basis. The stock trades at a ratio under 17, which is below its own five-year average. While the ratio may seem high it is not out of whack with GE's competitors. Honeywell (HON) trades with a ratio over 21, Siemens (SI) at over 15, Koninklijke Phillips (PHG) at almost 43, and Citigroup (C) at almost 16. Furthermore, none of these competitors come close to matching the diversity of GE. Consider that Citigroup is a financial services provider and nothing else, while Honeywell, though somewhat diverse, lacks GE's diversification in the areas of financial services, mining, and battery production. While Siemens might compete with GE in the green energy field, it lacks the consumer appliance market that GE is a leader in. Add in GE's dividend, and the stock has an implied upside of over 20% in the next 12 months or so, a nice rate of return on a very stable stock. Revenue growth is strong - averaging 10%-15%. Revenue has increased, on average, around 3% per quarter. This revenue growth is showing up in increased earnings per share. GE's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. I believe this positive growth is going to continue into the next year. During the past fiscal year, GE increased its bottom line by earning $1.23 versus $1.14 in the prior year. This year, the market expects an improvement in earnings ($1.55 versus $1.23).
Investors have begun to recognize positive factors similar to those I am mentioning. GE has seen a rise in its stock approaching 35% over the past year. This may give investors pause and make many believe that there is little to no value in the company. But the fundamentals are strong and the company's tradition of expanding by acquiring small companies bodes well for the future.
Consider that net operating cash flow has slightly increased to over $7.75 million and a growth rate of over 4% by quarter. GE is proving that it can find value and increase revenue no matter what.
With its positive fundamentals and its management's focus on finding value in acquisitions and expanding into different markets, GE is a great addition to any portfolio. In the next year I expect good solid growth and an increase in share price of between 12% to 17%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.