I have long been intrigued by profitable businesses that cut their dividends. This is because many investors fail to realize that the recovery characteristics of a business change for the better when a business in distress is suddenly able to retain profits to rebuild rather than shipping out cash to shareholders due to dividend expectations that were created by declaration of the Board of Directors in many years past.
In the case of General Electric, it is a company that is slated to earn $7 billion in profits in 2019. Yes, that is heavily reduced from prior expectations calling for $9 billion in profits in 2019 before the company revealed that it had a $26 billion shortfall to make up due to poor estimates with its long-term care insurance arm. And yes, that figure was well below the amount of dividends that GE was paying out just a few years ago (as recently as 2016, GE was paying out more than $7 billion in dividends).
But this is what has gone ignored. $6 billion in retained profits, with only a few hundred million in dividends getting paid out, facilitates a recovery. This is especially true when the company’s new CEO is the former CEO of Danaher, arguably the most historically successful conglomerate this side of Berkshire Hathaway.
Over the next year, all of those profits will be earmarked towards restoring the company to form. Companies like Bank of America and Citigroup came roaring back to life over the past five years because they weren’t paying out anything more than a token penny per share dividend, allowing billions of dollars in profits to rack up at headquarters for use in mending the company.
If General Electric were still paying out a $0.24 dividend, or some other figure that consumed nearly all of its earnings, it could’ve taken a generation to recover. But that is not the case. GE has over $500 million in profits rolling into headquarters each month that is getting deployed by an excellent allocator to repair the business.
I think the 11% price jump the other day was just the beginning. There is so much cash coming in, that I see recovery is highly likely, if not inevitable. That said, the real jewel is the healthcare assets that are scheduled to be spun off later this year.
The headlines are misleading when it comes to General Electric coverage. It has subsidiaries that are pounding out cash that is piling up for reallocation within the business. I see a recovery coming.
Originally posted 2019-02-01 18:11:48.
