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General Electric (NYSE: GE) recently raised its dividend. Although the dividend increase was only 5%, from 22 cents to 23 cents per quarter, it marked another small but important step in the industrial giant’s long-term recovery.
The latest increase now gives the stock a current dividend yield of 3.7%, but its dividend may not be its only attractive feature. As GE rebuilds, it’s now poised for new growth.
GE Stock and the Recession
There’s a clear dividing line between GE in the past few years and now. Prior to the financial crisis of 2009 in the global economy, GE brought in $182 billion in revenue in 2008. The industrial behemoth racked up $17 billion in net income that same year, as its stock price reached more than $40 a share.
Just one year later, revenue dropped to $155 billion while income slid to $11 billion. The stock cratered at under $9 a share.
For a venerable Dow stock that had been a mainstay blue-chip in many a portfolio, this was all a huge blow. Investors felt further pain in 2009, when GE slashed its quarterly dividend from 31 cents to 10 cents.
Financial Pain
Everyone felt the pain of the 2008-09 recession. For GE, it was a double whammy.
Other industrial conglomerates such as 3M (NYSE: MMM), United Technologies (NYSE: UTX) and Honeywell (NYSE: HON), all of which operated in the same diversified global infrastructure space as GE, didn’t share General Electric’s massive exposure to the financial sector.
General Electric’s GE Capital division was a full financial service company with $600 billion of assets in 2008. Anything and everything in that sector was pummeled by the financial crisis. GE Capital’s exposure to the consumer as well as commercial finance sectors weighed the company down for years.
GE’s Rebuild
GE had a lot of work to do to rebuild its revenue and earnings. With its heavy industrial segments of aviation, equipment for utilities, the oil and energy businesses, along with its well-known consumer products such as light bulbs, GE was affected by the global sweep of the economic downturn. In essence, its diverse product lineup worked against it.
One major remedy for GE was to begin to shrink the size of its GE Capital unit. GE’s goal was to exit the consumer finance business and downsize GE Capital to $300-$400 billion. GE is still in the process of making 70% of its total company earnings come from its industrial business segment.
GE’s Recent Performance
Since 2010, GE has stabilized revenue at just under $150 billion annually, while it has increased net income from the $11 billion mark in 2009 to more than $13 billion in 2013. Revenue and earnings per share have been flat in these post-recession years due in large part to the slow recoveries in Europe, China and other emerging markets. In the face of remaining global headwinds, GE has attempted to streamline and focus its company more. It has sold units such as NBC Universal and other non-core businesses.
GE has worked to improve its balance sheet. It has lowered its debt by nearly one-third – debt largely in its GE Capital division as well as its infrastructure business – GE produced a total of $15 billion in free cash flow last year. As a result, the company is buying back shares and is committed to increasing its dividend.
GE returned $12 billion to shareholders last year in stock buybacks and dividends, and intends to return another $18 billion this year.
Outlook for Investors
Even with weakness in the oil industry, GE has forecast growth in earnings next year of $1.70 to $1.80 a share, which should be an increase of about 7%. GE expects its industrial segment to account for $1.10 to $1.20 per share of next year’s total EPS.
Analysts were unimpressed, however, as they had hoped for more. GE shares are down 8.5% year to date.
This creates an opportunity for long-term investors.
With a rise in EPS even to the low end of the forecast, GE stock will be trading at a reasonable valuation of around 15 times earnings. With improved fundamentals, a tighter business model, and a rising dividend, GE could eventually become a bellwether stock again.
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