Back in December, General Electric (GE) raised its quarterly dividend to shareholders by 15.80% to 22 cents per 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 per share to 10 cents per 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 per share and sold it at $8.63 per 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 per 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 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 per share. By 2009 the company had issued 517 million shares at $22.25 per 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 forecast 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 per share in 2012, and is expected to earn $1.63 per share in 2013 followed by an increase to $1.73 per share by 2014. The forward annual dividend of 88 cents per share translates to a roughly 50% payout ratio, which is sustainable.
The factors that could trigger growth in earnings per share over the next five years include:
1) Industrial backlog – The company’s backlog has increased to $229 billion, up almost 14% from prior year levels, as a result of expansion in equipment and service businesses. The company has a large installed base, where it provides its customers the ability to service their equipment. This large installed equipment base creates the opportunity to generate recurring service revenues from maintaining and servicing the equipment, which the client is happy to do, in order to avoid the hassle.
2) Cost cutting initiatives – The company plans to reduce administrative costs by $1.5 in 2013 and by $1 billion in 2014. Overall, General Electric is trying to simplify its business, and reduce the proportion of SG&A to revenues from 15.50% – 16% to 12% in 2016.
3) Share buybacks – The company has managed to reduce the number of shares outstanding from 10.678 billion in 2010, to 10.368 in 2013. The company is also planning to further reduce number of shares outstanding to 9.50 billion by 2015.