General Electric (GE 0.27%) increased its annual dividend by almost 16% in the last fiscal year, ended December 2014. It was the fourth consecutive increase after the recession forced the company to drastically slash its annual dividend in 2009. It's good to see consistent improvement, but a closer look shows that the growth rate has moderated to a great extent.
GE is a global company and is susceptible to various risks (economic, geopolitical, and industrial, to name a few), but at the same time, it has a diversified portfolio, a rich dividend-paying history, and solid free cash flow-generating abilities that should give investors confidence.
Image source: General Electric.
Diversified portfolio is a blessing
General Electric, a $260 billion company, has extensive exposure to the industrials and financial services sectors. The finance business under GE Capital made the company extremely vulnerable in the recession years, with its share price tanking almost 50%. To avoid a similar situation in the future, GE decided to divest the majority of its finance business and focus more on industrials. It's selling more than half of GE Capital.
Industrial business segments' revenue contribution. Image source: General Electric Q2 2015 press release. Chart by author.
Though reaching its 2007 high (over $42) will not be easy with the current share price hovering around $26, the company could be more resilient during any economical setback with a pared-down finance business.
The segments under GE's huge industrials business are mostly unrelated, and hence compensate for one another's weaknesses. Here's a comparative study of the last two quarters:
Data source: General Electric press release. Chart by author.
Let's consider the oil and gas segment -- currently the most vulnerable because of oil price volatility. In the most recent quarter, ended June 2015, the segment's revenue decline almost doubled sequentially, but growth in other segments made up for the loss. A similar trend occurred in order and backlog.
GE has two sources of revenue: equipment and services. Even if equipment orders drop, high-margin service contracts help to balance out the decline. In the second quarter, while equipment revenue for the oil and gas segment fell 20%, service revenue dropped just 9%.
Another advantage GE has is huge geographical exposure, so strength in one region makes up for weakness in another. Revenues are segmented under developed and growth regions, and more than 40% of GE's revenue comes from growth regions (ASEAN, Latin America, Australia, and Canada). During the second quarter, the revenue growth rate was higher in the growth regions, while order growth rate was higher in the developed regions.
History never lies
One might think investing in big conglomerates could be risky, as a weak global economy could impact all of their business segments. But here, General Electric has a solid stance: It has been paying dividends for over 100 years. It could have remained a Dividend Aristocrat (a company that has increased its dividends for 25 or more consecutive years) if not for the merciless dividend cut in 2009-2010 because of the financial crisis.
But GE has regained its momentum by regaining its 2009 dividend level in 2014. For the 2015 fiscal year, the company plans to increase its dividend (to 4.5%) for the fifth consecutive time -- and hopes to continue doing that for the coming years.
Data source: General Electric. Chart by author.
Fundamentals are strong enough to build trust
Over the years, GE has maintained an operating cash level of more than $15 billion. Free cash flow level is considerably strong, too. In the last fiscal year, free cash flow increased 6% to $11.2 billion.
GE had a solid backlog of $272 billion as of the second quarter and sees industrial profit increasing at a double-digit rate in 2015. It also expects free cash flow to be between $12 billion and $15 billion. If this target is met, further dividend increases shouldn't be a problem.
Data source: Morningstar.com, company press release, and 10-K. Chart by author.
Last words
GE can benefit from its huge economies of scale, and it has substantial liquidity. The company has an excellent record of rewarding shareholders, and it's trying to become more resilient so that the ghosts of the past don't return to haunt its growth. GE is doing all it can to keep those dividends coming, through thick and thin.
