Friday, February 7, 2014

General Electric Stock Analysis

Back in December, General Electric (GE) raised its quarterly dividend to shareholders by 15.80% to 22 cents/share. This marked the fourth consecutive annual dividend hike for this conglomerate, which is organized in the Oil & gas, Power & Water, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions and GE Capital segments. The company has now raised dividends for four years in a row, since the decision to cut distribution in 2009.

I was one of the investors of General Electric back in 2009, who sold immediately after the dividend cut was announced. The quarterly dividend was cut from 31 cents/share to 10 cents/share, which was the first reduction in distributions since 1938. Prior to that event, management had continuously reassured investors that the dividend was safe for at least 4 – 5 months. Unfortunately, the credit markets froze in 2008 – 2009, and the company obtained a $3 billion vote of confidence from Warren Buffett. As it also sold stock to other investors, it became apparent that maintaining adequate liquidity might get a higher priority than the dividend.

I lost money on General Electric, but this is not the reason I have not bought back the stock. I had found other attractive opportunities for several years that were easier to understand, and I thought had repetitive sales to customers that were more durable in nature. I had purchased my stock at $28.97/share and sold it at $8.63/share. The tax credits on my loss of approximately 30%, add in another $6.10 to the sale price. Later on, I reinvested the proceeds into Abbott Laboratories (ABT) at $45.06/share. If GE had simply kept the dividend, I would have likely kept the stock, but allocated distributions elsewhere. Back when I was building my portfolio in 2008, I held a small position in M&T Bank (MTB), whose dividend was growing prior to that. For the past six years however, the dividend has been flat, yet I kept holding on to the security. I have recovered almost 20% of my purchase price merely from the dividend in 5 years. This fact proves the point that dividends serve as cash rebates on your purchase price.

General Electric (GE) has had a pretty terrible timing of its share buyback plan over the past decade. The company spent billions between 2005 and 2007 repurchasing 513 million shares at average prices of $34.99, $35.92 and $38.83/share. By 2009 the company had issued 517 million shares at $22.25/share, in order to obtain liquidity in the wake of the global financial crisis. This does not look like intelligent capital allocation. Of course, the world economy experienced an unprecedented liquidity crunch at the time, which executives could not have reasonably forecasted between 2005 and 2007. Currently, the company is planning on repurchasing up to 700 million shares, and bringing the number of shares outstanding to 9.5 billion.

Over the past decade, earnings per share have increased from $1.55 in 2003 to $2.20 in 2007, before falling to $1.03 in 2009. General Electric earned $1.39/share in 2012, and is expected to earn $1.63/share in 2013 followed by an increase to $1.73/share by 2014. The forward annual dividend of 88 cents/share translates to a roughly 50% payout ratio, which is sustainable.

Despite the fact that the company has only raised dividends for four years in a row, it looks attractively priced today at 16.50 times estimated 2013 earnings and a nice yield of 2.80%. I would be the first one to admit that it looks like a decent value at current levels. In addition, it also looks like the company is recovering and earnings per share could grow at 4-7%/year for the next five years. It is very likely that GE should do fine for a long-term holder with a 20 – 30 year horizon. Depending on the availability of ideas at the time of capital availability, I would consider GE for potential inclusion to my dividend portfolio. Of course, if I find a company that has grown dividends for ten years in a row, yields around 3%, sells for less than 17 times earnings, and can grow dividends by 6 – 7%/year for the next five years, chances are I might choose the other company instead.

Full Disclosure: Long ABT and MTB

Relevant Articles:

Seven dividend companies bringing holiday joy to shareholders
General Electric (GE) raises dividends again –should you care?
Avoid Dividend Cutters at All Costs
Dividend Cuts - the worst nightmare for dividend investors
When to sell my dividend stocks?

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to have future articles emailed to you [Email] or follow me on Twitter [Twitter].

0 comments:

Post a Comment

Recent Posts From DIV-Net Members