GE’s Cash Cow Makes a Strong Bull Case

by Kyle Woodley | May 31, 2013 8:40 am

When General Electric (GE[1]) announced a couple weeks ago that GE Capital would be providing its parent with $6.5 billion in dividends, the market yawned.

Stock of the Week[2]Call it what you want — a relative drop in the bucket, lesser news on a bigger day … or maybe it sniffed of a little investor apathy specific to GE itself.

I wasn’t investing when General Electric slashed its dividend and suspended buybacks amid the worst of the financial crisis in 2009, so I don’t have any firsthand painful memories. But several people around the office still marvel at the GE hate mail they’ve received ever since then … investors decrying GE, saying they’d never buy the stock again, never trust the company, no matter what it did in the future.

Maybe it’s just my frosh perspective — the fact that I’ve never been burnt by General Electric — but at least from a using-buckets-of-cash-to-put-out-a-fire perspective, it might be worth a second consideration.

Not that corporate literature isn’t cheerleading dreck (it is), but you kind of get an idea of where CEO Jeff Immelt’s head is at by flipping through just a few pages from this glossy 2012 report[3]. “Dividends” and “buybacks” are mentioned a combined 18 times in short order. GE is doing a lot of corporate shimmying and changing its overall structure to become a leaner, meaner and more balanced machine, but it’s pretty apparent General Electric believes its future success — and its way back into investors’ hearts — is dependent upon its ability to make it rain.

So far, so good.

On the dividend front, General Electric currently pays out 19 cents a share quarterly — still closer to the 10 cents GE cut its dividend to than the 31 cents it dropped from, but it does reflect a 90% improvement in the payout within roughly two years.

By my math, it has bettered its dividend by roughly 0.3 cents per month since its last 10-cent payout in June 2010, meaning a return to 31 cents (at this rate) could be possible in 40 months — or by the end of 2016. Considering the dividends being provided by GE Capital — and Immelt’s plan to shrink GE Capital’s assets[4] by as much as 25% or possibly just spin off some of its finance arms via IPOs — that date could be even earlier.

Such a rise in payouts would equate to a yield of roughly 5.3% for anyone who bought in today.

Of course, the improvement to the lesser-mourned cutbacks — stock repurchases — isn’t anything to sneeze at either. Here’s a look at General Electric’s buybacks since 2010, including 2013 projections:

GE Share Repurchases[5]

And those buybacks are significant. Analysts currently estimate that General Electric will earn $1.66 per share this year, or 9% more than last year’s $1.52. Shave roughly 424 million off the “S” in “EPS,” and you get 2013 EPS of $1.72, or a 14% improvement.

It’s not organic growth — and while I won’t discuss it in this post, I do think General Electric is making a few decent moves on that front, too — but who cares?

This glorious post[6] from Josh Brown at The Reformed Broker discusses “the new R&D” of American enterprise — repurchases and dividends — including eye-popping stat attacks like this (via Zero Hedge’s Tyler Durden[7] via Josh Brown):

Of the change in S&P TTM operating earnings between Q3 2011 and the just completed Q1 2013, a stunning 60% or $2.20, of all “gains” of $3.70 have been the result of buybacks. The remainder: a tiny $1.50 is due to actual organic growth. This means that nearly 60% of the bridge between the LTM operating earnings of $94.60 as of Q3 2011 to $98.30 at Q1 2013 has come from corporate management teams engaging in shareholder friendly activity.

In layman’s terms, blue-chips are buying their way to success by unloading massive cash hoards. Buybacks’ role in all this is juicing earnings, which in turn has provided a lot of spark to the Wall Street buying frenzy of the past few months.

General Electric is merely playing this game more aggressively than most: It’s advancing its dividend like a company that has something to prove — oh hey, it does! — and it’s repurchasing stock so fast, Immelt could be forgiven for idly Googling “How to run a privately held company.”

Again, you have to believe in its evolving but still many-armed business for any of this to matter — and I do — but the GE gravy train is itself a mighty compelling case.

Kyle Woodley[8] is the Deputy Managing Editor of[9]. As of this writing, he was long GE. Follow him on Twitter at @IPKyleWoodley[10].

  1. GE:
  2. [Image]:
  3. from this glossy 2012 report:!report=home
  4. Immelt’s plan to shrink GE Capital’s assets:
  5. [Image]:
  6. glorious post:
  7. Tyler Durden:
  8. Kyle Woodley:
  10. @IPKyleWoodley:

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