General Electric (GE) continues to represent a rare opportunity for dividend growth investors.
Most (not all) dividend growth investors seem to dedicate their analysis to what has happened to the dividend in the past, instead of thinking about what will happen to the dividend in the future – not next quarter or next year, but over the next 5, 10, 20 years. Holdings in the Dividend Growth portfolio aren’t chosen because they are heroes of yesteryear, but instead, they are chosen because we think they will be the best dividend growth performers in the future. In this light, we think GE continues to be shunned by new dividend growth investors that are looking to its dividend cut in 2009 as a means to not own the stock. We simply don’t think that’s fair, as the past…well…it’s the past.
Today, GE is fundamentally a different company. No longer is it beholden to the outsize credit risks related to far-reaching financial operations that forced it to cut its dividend. In the third quarter 2014 alone, the company completed the successful IPO of Synchrony Financial and moved forward its plans to shed the GE Money Bank AB (Nordics) consumer finance unit. Though its Alstom energy acquisition could have been better-timed and better-structured, GE remains on track on its strategy to achieve 75% of its earnings from its Industrial businesses in 2016, and the firm is well on its way to permanently reducing the risk that caused it to slash its dividend in the past.
Image Source: General Electric
On December 16, the industrial conglomerate released an investor presentation titled “The Pivot.” Though the firm noted ongoing challenges with respect to lower oil prices, Russia (RSX), and foreign-exchange volatility, it pointed to the strong recovery in the US, strength in air (aviation in China), rail (global locomotives) and US healthcare, as well as global infrastructure demand as key positives. GE thinks China (FXI) is “still ok,” and mentioned cheaper oil as a potential catalyst from struggling Japanese (EWJ) and European economies.
Within its industrial operations, management expects Alstom synergies, a broader focus on gross profit, and more scale with a simpler foundation to propel industrial earnings. Industrial segment organic growth of 2%-5% in 2015 is achievable, and the firm expects industrial segment margins to reach 17% by 2016, which is quite notable given headwinds in its energy segment, where operating profit is expected to fall just ~0%-5% despite plunging crude oil prices. Aggregate industrial segment return on total capital measures are expected to be very solid during the next couple years.
Image Source: GE
GE is targeting earnings per share in 2015 in the range of $1.70-$1.80 (with the industrial segment accounting for about $1.10-$1.20 of the total). Cash flow from operations in 2015 will be a very, very healthy $14-$16 billion. The executive suite is anticipating earnings per share growth in 2016, even after the Synchrony split. The company is on solid ground.
Wrapping Up the Pitch
We simply think investors don’t believe the transformational story behind GE. The company is trading at ~13.5 times 2015 earnings, and in a market that is offering 20+ multiples to any firm with a 3% dividend yield (whether earnings are growing or not), GE is simply mispriced and being left out in the cold. To us, the transformation story is obvious, and the valuation opportunity is tremendous, especially as investors are paid with a nice healthy dividend to wait. We’d grow mighty interested in adding to the positions in the newsletter portfolios under any further weakness. Our fair value estimate of GE is $32 per share.