Dividend Analysis - General Electric Company (NYSE:GE)
26 June 2007If there is safety in size, then we have found ourselves a winner! Next up is General Electric Company which trades on the NYSE under the symbol GE. It is, of course, a member of the S&P 500 Dividend Aristocrats and has raised its dividend for the last 25 consecutive years.
Company Profile:
From Yahoo Finance
General Electric Company (GE) is a diversified industrial corporation. Its Infrastructure segment produces jet engines, turboprop and turbo shaft engines, for use in military and commercial aircraft; wind turbines; aircraft engine derivatives; gas and steam turbines, and generators; oil and natural gas compressors and turbines; diesel-electric locomotives and parts; and productivity solutions for industrial and municipal water systems. It offers various financial products and services aviation and energy sectors. The company’s Commercial Finance segment provides loans, leases, and other financial services to manufacturers, distributors, and end-users for various equipment and capital assets. Its GE Money segment provides financial services to consumers and retailers, such as credit cards, loans, mortgages, deposit and savings products, and other products. GE’s Healthcare segment manufactures equipment for magnetic resonance, computed tomography, positron emission tomography imaging, X-ray, patient monitoring, diagnostic cardiology, nuclear imaging, ultrasound, bone densitometry, anesthesiology and oxygen therapy, and neonatal and critical care and therapy. Its NBC Universal segment provides network television services; produces television programs and motion pictures; operates television broadcasting stations; owns various cable/satellite networks; and operates theme parks. The company’s Industrial segment offers home appliances; lamp products; electrical distribution and control products; motors and control systems used in end-industrial and consumer products; commercial lighting systems; plastics and structured products; protection and productivity solutions; handheld and portable field calibrators; equipment for detection of material defects; stand-alone measurement instrumentation; and systems for validating or certifying commercial and industrial processes.
Whew! Trying saying that 5 times in a row! This is a behemoth of the stock market with a market capitalization of $393.11B and employs 319,000 employees.
Company Fundamentals:
First up is our management check. The Return on Invested Capital (ROIC) is not what I would have expected. It is actually quite disappointing. In the beginning of the 10 year period, GE had an ROIC of around 10%. However, in the last 5 years, the average ROIC is a mere 5.70%.
However, if we jump to the Return on Equity, we can see some healthy returns. The 10 year average is 21.43% and the 5 year average is 18.54%. Of course, when there is this kind of discrepancy between the ROIC and ROE, there must be a lot of debt somewhere! And sure enough, total debt as a percentage of capital is a whopping 79.8%! Obviously management has been deploying this debt effectively as their ROE far outshines the ROIC.
The equity growth rate has been consistent over the 10 year period. The 10 year average is 13.81% and the 5 year average is 15.26%. However, the last 2 years have been rather disappointing at -0.36% and 4.77%, respectively.
Earnings per share growth rate has also been rather consistent - and consistency is good for a dividend paying stock! Over the 10 year period, the growth rate was 9.64%. The 5 year growth rate was 6.98% and the current EPS growth rate is 13.07%.
Sales growth rate has been low - in the 6% range over the 10 years. But we are taking about some rather large sales in the $160B range!
Dividend Fundamentals:
General Electric Company is currently sporting a 2.93% dividend yield. That is better than both the S&P 500 and the DJIA dividend yields.
Dividend growth has been approximately 11% over the 10 year period and has remained quite consistent. Explains why it is an aristocrat! And cash flow growth rate has been keeping up fairly well with a growth rate of just over 8% for the 10 year period.
The dividend payout ratio has increased over the 10 year period from a low of 43% to the current 51.76%.
Valuation Models:
Looking at the historical average high dividend yield, I see a 5 year average of 3.17%. With that yield, my model price for GE would be $35.33. At close of Friday, the current price was $38.24 which implies a premium of 8.23% over my model price.
Calculating the Graham number, I came up with a model price of $22.61. That is a premium of 69% over the current price.
Using my present value method, I have to determine the future price of the stock 10 years from now. Looking at the historical P/E data, I see that GE is currently trading at a low P/E of 18.39. I will use that as my future P/E.
For EPS growth rate, my initial estimate would be 13.81% which is the 10 year average equity growth rate. The analysts have predicted a 10% growth rate. I will use their more conservative estimate.
So, if I grow the current EPS by 10% for the next 10 years, and then multiply that by my future P/E, I come up with a future stock price of $99.19. Discounting that to today using a 15% discount rate, the present value of GE is $24.52. That is quite close to the Graham number and represents a premium of almost 56%.
See all my calculations here.
Conclusion:
General Electric Company has definitely been a dividend champion in the past. They have consistently grown their dividend at double digit rates over the last 10 years. The fundamentals look solid. My only concern is the lack of equity growth rate over the last 2 years. There is still some wiggle room in the dividend payout ratio to keep increasing the dividend if cash flow growth rates decline, but those have been pretty steady.
All in all, it looks like a good consistent dividend payer for our portfolio. Both the Graham number and the present value calculation concur that this stock is expensive, but the current yield is approaching its average high. And yield is first and foremost my valuation tool.
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