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Is General Electric’s Dividend Safe?

By Dan Weil   |   Wednesday, 30 Mar 2011 03:26 PM

GE’s CEO Jeffrey Immelt has said that cutting the formerly sacrosanct General Elecrtric dividend was “the toughest decision I ever had to make as CEO.”

In the waning heat of the financial crisis in 2009, GE’s board slashed its quarterly dividend by 68 percent in mid-2009 to 10 cents per share — the company’s first dividend cut since 1938. But since then, GE’s financial fortunes have rebounded, and it has lifted the dividend twice, by 40 percent in total, to 14 cents per share.

To be sure, that’s still less than half the pre-crisis level of 31 cents per share, but the company is determined to keep raising the payout. And its improving financial performance puts it in position to do so. The company’s dividend yield totaled 2.83 percent as of March 25.

Immelt, who took the helm of the storied company from business legend Jack Welch in 2001, has repeatedly stated that GE plans to pay out about 45 percent of its annual profit to shareholders and that it will keep lifting the dividend to match earnings growth.

When GE announced its most recent dividend increase in December, Immelt cited “continued strong cash generation, accelerated recovery at GE Capital, and solid underlying performance in (GE’s) industrial businesses through year-end 2010.”

Earnings per share rose about 50 percent in the fourth quarter of last year to 42 cents, up from 28 cents a share a year earlier.

If GE was to pay out 45 percent of the latest per-share earnings figure, as Immelt seeks, that would amount to a dividend of almost 19 cents per share, compared to the current 14-cent quarterly dividend.

And if GE was to raise its dividend in synch with the increase in its fourth-quarter earnings, as Immelt also seeks, that would imply a quarterly dividend of 21 cents per share.

GE’s earnings from continuing operations surged 31 percent to $3.93 billion in the fourth quarter, surpassing analysts’ estimates. Revenue climbed 1 percent to $41.4 billion, also exceeding analysts’ forecasts.

Strength in the finance, health-care and transportation units made up for weakness in the energy division.

“The company came in and exceeded expectations,” Stephen Hoedt, an analyst at Key Private Bank, whose parent company owns 17 million GE shares, told Bloomberg. “Global industrial production continues to be solid.”

The poor performance of GE Capital Services, which held a bevy of soured mortgages, is what created so much trouble for the company during the financial crisis. But the unit has rebounded since bottoming in 2009. It made $3 billion last year, and there are experts who say they see the potential for that figure to double.

Some investors are worried about GE’s nuclear power business because it designed the reactors for Japan’s earthquake-damaged Fukushima Daiichi nuclear power plant, which is currently spewing radiation into the surrounding environment. But plant design isn’t the problem in Japan, experts say — failure to plan for natural disasters is the issue.

“I think GE should really be saluted for their design of the reactors,” University of Southern California engineering professor Najmedin Meshkati, a nuclear safety expert, told The Christian Science Monitor. “(The crisis) really hasn’t been a problem with the reactor design.”

Meanwhile, analyst opinion is on the side of GE, with eight analysts ranking it a strong buy, two a moderate buy, and six a hold, with none calling for selling the stock, according to ratings posted on MSN Money.

Considering the hand-wringing that went into the decision to slash the dividend in 2009, the prevailing opinion is that Immelt and the board would be loathe to make such a decision again. In addition to the company’s current financial picture, investors looking for a sense of safety surrounding the dividend can certainly take heart in that.

 

 

 

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GE s CEO Jeffrey Immelt has said that cutting the formerly sacrosanct General Elecrtric dividend was the toughest decision I ever had to make as CEO. In the waning heat of the financial crisis in 2009, GE s board slashed its quarterly dividend by 68 percent in mid-2009 to...
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2011-26-30
 

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