GE: Getting More Gorgeous by the Day

Rich Smith, The Motley Fool
Updated

Well? Was I right, or was I right? (Hint: I was right.)

A little over six months ago, I mentioned how General Electric (NYS: GE) CEO Jeffrey Immelt's plans to return GE to a "normal" dividend payout, when combined with share buybacks and growing earnings, had the potential to result in a $0.87 annual dividend, and a 4.6% dividend yield on the stock, by 2012. Already, we're halfway there.

Last week, GE announced a 13% hike in its quarterly dividend to $0.17 per share. Working off today's stock price, this amounts to a 4.1% yield on the company's new $0.68 annual commitment to its shareholders. It's a better payout than you'll find at fellow leading industrialists Caterpillar (NYS: CAT) , Boeing (NYS: BA) , or United Technologies (NYS: UTX) -- and GE sells for a lower P/E, to boot. A nice start, in other words -- but here's the best part: I don't think GE's done yet.

In fact, I think GE just might be the best thing since sliced bread for dividend investors.

And by bread, I mean money
Here's how the numbers work: According to Immelt, the plan is to get GE back up to about a 45% payout ratio -- i.e., to pay out 45% of net income in the form of dividends. Right now, analysts expect the company to earn about $1.56 per share next year. A 45% payout on that would therefore work out to about $0.70 per share in dividends.

But consider:

  • GE has beaten analyst earnings predictions in three of the past four quarters.

  • The NBC Universal joint venture with Comcast improves the company's cash position.

  • To top it all off, Immelt has promised to deploy part of its massive $19.4 billion in annual free cash flow to "reduce the float" of its shares.

Foolish takeaway
Result: However much of GE's net income gets paid out in the form of dividends, it could result in even larger increases to dividend yield because there will be fewer shares outstanding. Simply put, the divvy will get divvied up among fewer shares.

Now here's the best part: Thanks to a laggard stock price, GE can now achieve the 4.6% dividend yield I predicted back in July by adding just $0.07 to its annual payout -- that's less than it added just last week. And GE's already upped its divvy four times in the past 18 months.

Think it'll do it again? I do. That's why at close of trading today, I intend to reopen my outperform recommendation on General Electric, publicly endorsing the stock on Motley Fool CAPS. Feel free to follow along -- and hold me accountable if I'm wrong.

What's the next chapter in GE's corporate turnaround story?Add the stock to yourFool Watchlist, and read along.

At the time thisarticle was published

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