General Electric Demonstrates Impressive Cash Flows

| About: General Electric (GE)
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By Ahmed Ishtiaq

General Electric (NYSE:GE) is one of the biggest diversified technology and financial services corporations in the world. The company provides products and services ranging from power generation, aircraft engines, household appliances, and water processing to medical imaging, industrial products and business and consumer finance. GE serves customers in over 100 countries and employs roughly 301,000 people worldwide. Since its incorporation in 1892, GE have developed or obtained new services and technologies that have widened and altered the scope of its activities.

GE has an illustrious history of dividends, including a constant increase on an annual basis since the sub-prime crises. At the moment, GE pays an annual dividend of $.68 which translates into a dividend yield of 3.02%. In my previous article, I talked about the cash flows, earnings and debt of the company. However, in this article, I have tried to perform a deep analysis of the cash flows of the company.

Free Cash Flows:

Free Cash Flows




Net Income




Depreciation and Amortization




Funds from Operations (FFO)




change in noncash current assets




change in noncash current liabilities




Operating Cash flows




Capital Expenditures




Free Operating Cash Flow




Long Term Debt




Source: SEC filings

In the past three years, the company has experienced a steady increase in its net income. At the end of 2009, GE net income stood at just above $11 billion, which went up to over $14 billion by the end of 2011. The same trend is apparent in funds from operations, and the current sum stands at a spectacular $23.3 billion. The cash flows from operations stand at massively improved levels in 2011 as compared to 2009. At the end of 2009, cash flows from operations were $24.59 billion, which jumped up to more than $33 billion by the end of 2011. The firm has been successful in converting most of its sales into cash flows, indicating high quality of earnings.

GE invests a heavy amount of funds in the capital expenditures, which has been increasing in the past three years. At the end of 2009, the firm spent $8.6 billion in capital expenditures; however, by the end of 2011 the capital expenditures for GE have gone up to $12.6 billion. As a result, the free cash flows demonstrate a mixed trend over the past three years. Free operating cash flows were the highest in 2010, due to high levels of cash flows from operations. At the end of 2011, free cash flows stood just below $21 billion.

Essential Cash Flow Ratios:

Essential Ratios




Funds from Operations(FFO)/Total Debt




FFO/Capital spending requirements




Free Operating Cash Flow + interest expense/ Interest expense




For my analysis, I have used three essential ratios: FFO to total debt ratio shows that the debt of the company is adequately covered with the funds from operations. In fact, the ratio has improved over the previous three years. The reason for an improving ratio is an increase in cash flows, and a decrease in debt. FFO to capital spending ratio indicates that one of the most important components of the firm is easily covered with the funds from operations. Capital expenditures are a vital cash outflow for GE, and the analysis shows that the firm should be able to meet its capital spending requirements through its internally generated funds.

The last metric (free operating cash flow + interest expense/ interest expense) in the table indicates that the firm is able to meet its interest payments sufficiently. The magnitude of the last ratio shows that, despite high levels of the debt, the firm has no trouble in meeting its interest obligations. In fact, the interest coverage ratio has improved substantially over the previous three years. GE paid $6.45 billion in cash dividends during 2011 and generated almost $21 billion in free cash flows. The dividends of the company are covered adequately through its free cash flows.


GE stock took a beating after the financial meltdown of 2008, due to its reliance on the financial services division. However, with a dividend yield above 3% General Electric could be a good long-term investment. Its financing operations are more than adequately covered by internally generated cash flows.

The long-term debt is going down, whereas the funds from operations keep rising. I believe General Electric has the potential to yield significant capital gains. In addition, the dividends of the company look safe. GE dividends are well covered through free cash flows, which are likely to increase thanks to improved operations. I expect a dividend hike in the first quarter of 2013. After all, GE Capital is improving and reporting impressive results.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.