Gorgeous, Generous General Electric

Is General Electric (NYSE: GE  ) the best thing that ever happened to investors? It just might be.

At 16 times trailing earnings, the stock's as cheap as fellow industrialists United Technologies (NYSE: UTX  ) and Boeing (NYSE: BA  ) , and considerably less expensive than Citigroup (NYSE: C  ) , which competes with GE in the credit market. GE's growing faster than these peers, with analysts predicting 14.5% annual growth over the next five years. It also pays a 3.1% dividend, better than anything these peers offer.

And you know what? As good as GE looks today, it's about to get better. That's the upshot of a Financial Times report last week, which quoted CEO Jeff Immelt promising to "reduce the float" at the industrial behemoth, and buck up the dividend as well. All of which sounds good but what does it mean, specifically?

Immelt didn't go into great specifics on what this means to you, the investor -- so I will.

What it means to you
Over the last 12 months, GE earned a net profit of $1.20 per share but paid its shareholders only $0.50 per share in dividends. But over the last 10 years, GE paid an average of $0.84 per share in annual dividends -- 52.8% of its annual net income (its payout ratio).

Even if GE doesn't return to historical levels of profitability, a return to just "normal" payouts therefore implies a 28% hike in dividends to about $0.64 per year. And it gets better.

If GE earns the $1.36 that analysts expect it to this year, a 52.8% payout ratio could push the dividend up to $0.72. If GE then earns the $1.65 it hopes to achieve in 2012 profit, the dividend could leap to $0.87 in 2012 -- a 74% jump from GE's recent payouts.

What to do
If that's the way things play out, GE could soon pay a 4.6% dividend yield on today's $19-ish stock price. Now combine this with analysts' 14.5% growth rate projections, and the impact of Immelt's promised $12 billion stock buyback (nearly 6% of GE's market cap). Taken as a whole, I believe GE's recent announcements justify at least a 20 times multiple on the stock, and perhaps a 25% increase in the stock's current market cap.

To me, GE's generous dividend makes this stock a truly gorgeous opportunity for investors.

Keep tabs on GE's corporate turnaround story. Add the stock to your Fool watchlist.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors


Read/Post Comments (6) | Recommend This Article (19)

Comments from our Foolish Readers

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  • Report this Comment On May 24, 2011, at 6:46 PM, stx325red wrote:

    hey, that sounds great-too bad I bought at $37 and change

  • Report this Comment On May 24, 2011, at 6:55 PM, idahogeo wrote:

    Thanks for the GE coverage. There doesn't seem to much love for this old company on the Fool's boards. I'm not too familiar with investors' history on this one, but when I started looking into it late last year I thought things looked pretty good for a conservative investment and started building a position. So far, I can't complain and if these ideas about dividend growth pan out, well, sweet!

  • Report this Comment On May 24, 2011, at 7:43 PM, midnightmoney wrote:

    Rich,

    You seem to have taken off your shirt and to be swirling it round your head in front of a bunch of ge shareholders. You're sweating and the crowd is cheering you on because they like the message--you're like David Lee Roth in suspenders, running with the devil, gyrating this and thrusting that (the payout ratio and dividend, of course). I like the message and am standing on my lazy-boy chair playing air guitar and eating air pizza and saying yes yes yes! I'm not Eddy Van Halen, not necessarily, but I do own my share o' GE!

    Then I recall Immelt at a recent earnings call saying he wanted to keep the po ratio around 40% and the div yield at 3%? I'm not sure who he would be if we decided to keep the band together.

  • Report this Comment On May 24, 2011, at 9:35 PM, ozzie wrote:

    http://caps.fool.com/Ticker/GE.aspx - nearly 96% of Allstar Fools agree that GE is a good choice.

    And one could go on to talk trends - which way are the markets going for solar, healthcare technology, Nuclear (despite Japan), Mortgages (only one way to go from the nadir), Energy technology, Transportation. It is important to note that GE beginning in 2009 decided not to forecast earnings. So the $1.65 is a "best guess". We'll know soon enough how accurate a reading that is for GE for 2012.

  • Report this Comment On May 24, 2011, at 10:39 PM, kdt34wqx wrote:

    This author has no clue what he's talking about. GE drops every day. Investors are much too smart to believe what Immelt is saying. Look at his track record. GE is worth no more than $13 per share. The only people who make money on this company are shorts.

  • Report this Comment On December 02, 2011, at 8:11 AM, ez2cy wrote:

    I agree with 102971. GE should be broken up as its parts are worth more than the whole. Further an immediate $1B can be taken to the bottom line by eliminating Fairield.

    The current team, board included has demonstrated they are incapable of building shareholder value.

    The CEO gets $22M/yr and has lost $200B in market cap over ten years....I would have done it for $1M/yr!

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