Is General Electric Company's Dividend Rock-Solid?

While GE devastated dividend investors with a cut in 2009, the American manufacturing icon is on a road to recovery.

Feb 16, 2014 at 2:00PM

Since the depths of the last recession, investors have become enamored with reliable, dividend-paying stocks. This infatuation with income led my colleague Morgan Housel to speculate that the market was nearing a "dividend bubble" in 2012. There was nothing far-fetched about the prediction, but that bubble's yet to burst as far as I can tell.

In fact, for companies like General Electric (NYSE:GE), which suffered setbacks during the financial collapse of 2008, a growing, healthy dividend has become even more sacred to shareholders. To evaluate whether GE's current dividend is built to last, however, investors need to look critically at four pillars of a stable payout: yield, growth rate, payout ratio, and cash management.

Yield
The first thing to catch any income investor's eye is an appetizing dividend yield, and GE measures up nicely in this category. GE's dividend yield, calculated as the total annual dividends divided by the current share price, clocks in at 3.1%. When compared with its American manufacturing peers, including Emerson Electric, 3M, United Technologies, Honeywell, and Boeing, General Electric's current yield tops the nearest competitor by 0.5%.

Growth rate
While a hearty yield is a great quality, a dividend company is only as good as its latest paycheck to investors. In other words, a true rock-solid dividend payer must continue to raise the dividend over time. As the following chart shows, "the General" posts mixed results when it comes to dividend growth.

Year

Dividends Paid

2013

 $0.79

2012

 $0.70

2011

 $0.61

2010

 $0.46

2009

 $0.61

2008

 $1.24

2007

 $1.15

2006

 $1.03

2005

 $0.91

2004

 $0.82

Source: GE Investor Relations.

GE axed its dividend in 2009, slicing the quarterly payout from $0.31 to $0.10 per share. Some dividend investors find such a transgression unforgivable, but GE wasn't the only company to face the chopping block. A number of blue chips reduced their payouts during the cash-strapped environment of 2009.

Pointing out worse behavior doesn't excuse GE's actions, but the company's been on the rebound ever since. Over the past three years, GE's compound annual growth rate hovers around 20%, well above peers such as Caterpillar, United Technologies, and 3M.

Payout ratio
To get a sense of whether GE is stretching its pocketbook to remit payments, there's no better metric than the payout ratio. To arrive at this figure, I divided the dividend payments by annual earnings, which revealed a healthy ratio of about 50% in recent years. As you can see, this metric has tapered off recently as GE shored up its banking unit, GE Capital.

 Metric

2006

2007

2008

2009

2010

2011

2012

Payout Ratio

 50.2%

 40.9%

 71.3%

 81.5%

 41.1%

 45.6%

 52.7%

Source: CapitalIQ.

Debt management
Finally, a company's ability to manage debt matters for dividend investors; after all, debt payments take first place in the pecking order. When it comes to debt management, however, there's no tried-and-true metric to fixate on.

For a company like General Electric, it's reassuring to see that earnings are at least five times greater than debt payment obligations since GE's interest coverage ratio equaled 12.8 in 2013.

Secondly, the total debt-to-capital ratio provides a sense of the current debt burden on a company's balance sheet. A ratio below 100% would generally signal that a company is not overleveraged, and GE's equaled 73.6% at of the end of 2013. Both of these figures have trended downward over the past three years, a sign that GE's strengthening its balance sheet over time.

Foolish takeaway
In last year's annual report, CEO Jeffrey Immelt set forth a goal that will resonate with all stripes of Foolish investors: "We want investors to see GE as a safe, long-term investment. One with a great dividend that is delivering long-term growth."

If GE aims to appeal to a dividend-hungry crowd, the company will need to score high marks in each of these four categories going forward. For now, GE's dividend looks rock-solid, but it will inspire even more confidence from investors as the financial meltdown fades into the background. If "time heals all wounds," GE's hoping its dividend cut won't leave a scar.

Ge Engineers Evaluate Pipeline Solutions

GE engineers evaluate pipeline solutions. Source: General Electric

Is GE a top dividend stock?
Studies show that that dividend-paying companies like General Electric handily outperform their non-dividend-paying brethren. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Isaac Pino, CPA, owns shares of General Electric. The Motley Fool recommends 3M and Emerson Electric and owns shares of General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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