If you own 100 shares of General Electric, you collect $92 per year in dividends as part of the current terms for owning 100/10,042,192,011 of the business. When your typical investor collects that $92 check, he is probably not thinking about the mind-boggling vastness of the company that generated almost incomprehensible revenue to produce that dividend check.
When GE shareholders rightfully got spooked in 2009, it wasn’t the vastness of the industrial empire that caused the Buffett bailout and first-in-seven-decade dividend cut—it was the fact that $80 billion in revenue was being generated by a poorly capitalized, low-quality real estate and credit card empire whose liquidity was contingent upon rising commercial real estate values and the payment of credit card debt from borrowers that didn’t prioritize their commitments to GE affiliates when times got hard.
GE could have prospered, or at least better prevailed, through 2008 and 2009 if it didn’t combine the two—you can deal in low-quality junk perpetually if you’re well capitalized to endure through the turbulent stretches, and you can get usually get away with being poorly capitalized if your cash flow is high quality and consistent (for a real-life example of this latter phenomenon, take a look at AT&T which chooses to maintain a $75 billion debt burden that is manageable because the current annual cash flow of $13.2 billion only declined from $12.8 billion to $12.5 billion during the worst of the recession because people take their wireless communications seriously).
What is interesting to me is how closely General Electric seems to be a cookie-cutter iteration of what Johnson & Johnson went through a few years earlier—you have the bluest of the blue chips not being valued like one. In the case of Johnson & Johnson, the concern was whether large one-time recalls would impair earnings for too long. In the case of GE, it seems that people want to see more years of dividend growth and the continued sale of the remaining financial divisions (which are capitalized at a 85% higher rate and have only 0.79% defaults in current times).
Most impressively, that $92 dividend check is coming from profits in over 100 countries based on revenues of $149 billion (about $79 billion comes from countries outside the U.S.A., and only $39 billion is currently non-industrial related). GE is a wide moat industrial with 27% profit margins, because companies have to fork over large sums of cash for GE’s manufacturing might and expertise to get power generation, oil and gas pipeline equipment, aircraft engines, light bulbs, fridges, household appliances, and the machines used in medical imaging.
It’ll probably take me a bit before I can fully analyze the Alstom acquisition, but GE looks to see profits jump from $16.5 billion to close to $18 billion sometime in the next 15 months or so (even with lower oil prices that are lowering the demand for some pipeline development so that profits are growing a little bit lower than expected).
For an individual investor, GE stagnating at $24 (or anything in the $22-$27 zone) is a blessing of sorts because it often takes a few years to get an investment position up to its desired size. Sure, there are institutional investors sitting on giant wads of cash that can be deployed all at once, but a lot of people on the retail side wait for their paychecks every two weeks to provide the new capital that goes on to become stock investments.
GE with a 3.81% is something that is very interesting. That was not something that existed before the financial crisis. 1980s, 1990s, most of the early 2000s, you were lucky if you saw GE hit the 3% mark. It was like Coca-Cola, usually in the mid 2% yield range, and occasionally creeping up to the 3% mark for a month or two every other year. Now, you have a company disappointing investors with only a 4.5% dividend hike, a reflection of the fact that the long-term dividend growth rate will be in the upper single digits but for the fall in oil prices that reduced sales in the oil & gas division.
But still, it’s fun getting paid to wait. If you paid $24 per share, you got to collect $0.79 in 2013, $0.88 in 2014, and at least $0.92 in 2015. You got to collect over 10% of your purchase price over three years from the most legendary industrial company in American history—with a company generating $16-$17 billion profits and almost $150 billion in annual revenues, you catches my attention. It’s a nice intersection of present income and quality.
Even a back-of-the-envelope calculation of $1 dividends for the next five years would indicate that you’d collect $5/$24, or 20% of your purchase price in dividends alone in the years 2015, 2016, 2017, 2018, and 2019. That’s a low-ball estimate because GE’s dividend will likely hit a $1 per share next year and continue to grow annually from there, and the reinvestment in the $20s will let you rack up even more shares of GE while the price is decent. Assuming optimistic dividend growth in the 8-9% range, and constant reinvestment, you could be collecting over 35% of your purchase price of the stock in dividends alone the next five years. In that regard, a General Electric investment is like buying Chevron right now. The dividend growth rate plus the current yield plus the quality of the asset is my kind of passive income stream. Run the calculations with GE dividends reinvested and check it out yourself—the yield on cost starts accelerating quickly once you get a few years out.
Originally posted 2015-02-04 21:07:27.