Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to former dividend king and conglomerate General Electric (GE 8.28%) and I'll show you why this once tarnished giant is regaining its luster.
Source: General Electric
GE's biggest weaknesses
As we do every time we examine a prospective dividend company, let's have a closer look at some of the factors which could hold General Electric back from reaching its full potential.
First and foremost, despite being well-diversified General Electric is still in the process of mending the health of its financial arm, GE Capital, from the recession. Like most banks GE found the credit quality of its loan portfolio was severely compromised in the downturn, and it's been working for more than five years to shed unwanted assets. This slow but steady reduction has resulted in regular year-over-year revenue declines for its GE Capital unit and has at times made it difficult for GE to deliver any meaningful top-line growth.
Another point of contention is that in spite of a large backlog, General Electric is somewhat at the mercy of the global economy. If China's growth is slowing and Europe is struggling to rekindle its economic engine then fewer large orders are liable to come streaming through. The U.S. government scaling back its spending in order to reduce its budget deficit could also be burdensome for GE.
Finally, GE is also in the midst of trying to acquire energy assets from France-based Alstom in what would be its largest acquisition ever at $16.9 billion. While acquisitions are great news for the overall market as it signifies that enterprises are willing to take on risk, it could also cast a cloud of uncertainty over GE given that the French government appears opposed to the deal. Also, incorporating a deal of this magnitude into an already complex company like GE could take years to fully realize expected annual cost synergies of $1.2 billion.
Blue Arc Machining Technology, Source: General Electric
The GE advantage
There is no bigger advantage to owning General Electric than its practically unparalleled diversity. GE has operations in the power and water, energy, health care, transportation, oil and gas, appliance and lighting, aviation, and financial industry. The advantage to its numerous ventures is that a downturn in one industry is likely to lead to an upturn in another. In other words, GE's operations are often hedged toward economic fluctuations, which helps alleviate one of the primary weaknesses (a global growth slowdown) listed above.
Another big reason GE represents a perfect set-it-and-forget-it stock is that a number of ventures involve inelastic products. What this means is that in both booming and falling economies GE's products are going to remain in demand, which also means that GE has little incentive to ever drop its prices. To add, the barrier to entry in a number of fields it operates in is pretty high meaning there will be no surprise competitors popping up overnight.
Source: General Electric.
Also keep in mind that GE is positioned in some the fastest and most attractive growing fields over the long term. Its wind turbine business, for example, has taken in 3,900 MW of orders since Jan. 1, 2013, when a renewable energy tax credit was extended in the U.S. Year over year, this total has jumped from just 1,000 MW in May 2013. Similarly, as the Affordable Care Act transforms the health-care landscape and makes it easier for consumers to have access to preventative care, the need for diagnostics such as the MRIs, which GE just happens to make, will become even more important.
Want another reason to own GE? How about the pending spin-off of its consumer finance division? General Electric is hoping to raise as much as $3.5 billion from the spin-off, which will likely be worth in the ballpark of $20 billion-$25 billion. The move would certainly be consistent with CEO Jeff Immelt's renewed focus on the industrial side of the business and would also make it a bit easier for investors to understand how GE makes its money. Generally speaking, the more transparent a company is these days, the better the chance of unlocking shareholder value.
Show me the money!
But let's face it; the real allure of GE is its steadily growing dividend payment that lines shareholders' pockets and keeps them coming back for more.
The recession tarnished GE's once rock-solid dividend, but we've seen a rapid resurgence of its payout over the past couple of years. Most of this payout surge has to do with its diversity and consistent profitability. Even in the darkest of times over the past decade GE has been able to produce at least $14 billion in annual free cash flow, which makes for a fairly safe dividend payout.
Graph by author, Source: Nasdaq.com. *2014 payout assumes $0.22/quarter.
As you can see above, General Electric quarterly dividend is up only 10% over the past decade, however, since being slashed in June 2009 to just $0.10 per share it's climbed 120% to $0.22 per share as of the most recent quarter. Its projected payout ratio of 52% this year, and 48% next year based on Wall Street's forward earnings projections, would also leave ample room for additional dividend upside. With a yield of 3.3% GE really offers the income-seeking, long-term investor one heck of a deal -- and at less than 15 times forward earnings that deal may be too good to pass up.
