Smaller GE Might Support Bigger Dividend
General Electric’s (GE) 3.2% current dividend yield is more than a full percentage point above the payout for the S&P 500 index. That income largesse is in large part a function still-depressed share price, and the fact that investors remain wary of the conglomerate’s heavy reliance on its financial services arm; the Wall Street Journal recently pointed out that the finance segment would rank as the fifth largest bank in the country if it were a standalone. In the first quarter, General Electric Credit Corporation (GECC) accounted for 33% of the mother ship’s revenue and 40% of profit.
As if this needs pointing out, during the financial crisis GE’s finance arm imploded and took the company hostage as shown in this chart, which includes competitors United Technologies (UTX) and Honeywell International (HON).
In short General Electric company tapped all sorts of government assistance-including $139 billion in loan guarantees for the finance arm -- and agreed to pay Berkshire Hathaway (BRK.B) 10% annual interest on a $3 billion cash infusion that was as important for its p.r. value (the Buffett Seal of Approval) as its balance sheet worth. Oh, and it also slashed its dividend 68%, putting it in the income investors’ doghouse from which it is still working its way out.
General Electric has been slowly reducing its reliance on the finance arm since the crisis, and this week GE chief Jeffrey Immelt announced the company is actively considering various moves that would accelerate that reformation. A stated goal is for the industrial segment to account for 70% of profits.
One potential move is a spin off of non-core pieces of the finance arm. If that plays out, it makes GE’s dividend all the more attractive. Reducing its reliance on the volatile financing arm can only help to ensure there is no repeat of the 2009 dividend cut. Moreover, proceeds from any sale or ipo creates more cash for GE to potentially funnel off to shareholders.
Already this year GE’s dividend payout rose 12% -- the payout is now nearly 60% above its 2010 low but is still 40% below its peak -- and announced a $10 billion stock buyback plan, more than double what it spent on share repurchases in the trailing 12 months.
In the meantime, as shown in this stock chart, GE’s balance sheet has done some serious mending.
The stock currently trades at a forward PE ratio of 14.2, right in line with its hybrid valuation as an industrial (15.3 average forward p/e for the sector) and financial (13.4 p/e).
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com.