By General Electric (ticker: GE) has undergone a remarkable turnaround that investors should take note of. CEO Larry Culp’s decision to cut the company’s dividend to just one penny in October 2018 seemed drastic at the time. However, given the company’s struggles and mounting debt, it was a necessary move to ensure survival. Culp took over in 2018 and further reduced the dividend from 12 cents to 1 cent per quarter, saving the company approximately $30 billion in payouts over the past few years. The dividend currently stands at 8 cents per quarter following a reverse stock split.
Fortunately, things have significantly improved for this U.S. industrial icon. In its recent second-quarter earnings report, General Electric reported an earnings per share of 68 cents, surpassing market expectations. Even the power business, which had been struggling, managed to achieve an operating profit of $18 million – its third consecutive quarterly profit in the past couple of years. This impressive turnaround was not an easy feat and required selling businesses, reducing debt by about $100 billion, spinning off GE’s healthcare division, and restructuring the power generation division in preparation for a spin-off.
With General Electric’s financials on the mend, it is time to shift focus back to the dividend. Paying a dividend requires substantial free cash flow – the money left over after covering operating expenses and capital spending – and GE is finally generating that. Analysts predict that the company will generate approximately $4.3 billion in free cash flow this year, with projected growth through 2026. A significant portion of this cash flow comes from GE’s aerospace business, where it enjoys a strong position as a producer of jet engines.
Additionally, General Electric has further enhanced its financial flexibility by announcing plans to retire its preferred stock in September. This move will release even more cash flow, benefiting common shareholders.
Overall, General Electric’s remarkable turnaround and its positive financial outlook suggest that the return of a meaningful dividend is now a realistic possibility. Investors should closely monitor this industrial giant as it continues to regain strength and stability in the market.
The Future of GE’s Dividend
As a shareholder of General Electric (GE), CEO Even Culp expressed his desire for a higher dividend. Culp acknowledges that the company needs to address one significant matter before considering dividend increases, which is the completion of the separation between GE Aerospace and GE Vernova.
The spinoff of Vernova holds great importance for the company, according to Culp. Once this separation is finalized, the boards of the two businesses will work together to develop a tailored capital-allocation strategy for each entity.
The spinoff is scheduled for early 2024, and along with it, a dividend is expected. RBC analyst Deane Dray suggests that GE Aerospace should pay a dividend in line with its industry peers. Based on recent trends, S&P 500 companies have paid out approximately 30% to 40% of their annual net income as dividends. Drawing a comparison to Honeywell International, which has a similar aerospace franchise, GE Aero could potentially offer a dividend as high as $2 per share within the next year or two.
However, Dray suggests that initially, the company should start more conservatively by paying out around 30% of its income. This would result in a potential dividend of approximately $1.30 per share. Compared to the current yield of 0.3%, this would provide a substantial increase with a dividend yield of 1.2%.
Therefore, the anticipation of a higher dividend serves as another reason for investors to hold onto their GE stock, especially given the company’s impressive performance in recent times.
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