An Old Conglomerate Might Be a New Dividend Aristocrat

A 3.3% dividend yield isn’t a bad yield. Indeed, it can be a very good yield, especially if it serves as the base for significant dividend
General Electric’s (NYSE: GE) 3.3% dividend yield just might be the base from which significant dividend growth arises.
Over the past week, GE has been the feature of many business headlines, and for good reason. The $280 billion market cap behemoth is finally getting a long-overdue makeover. The goal of the makeover is to create long-overdue shareholder value.
Specifically, GE is scaling way back on its low-return real estate and finance businesses. GE has already agreed to sell $26.5 billion in real estate assets to Blackstone Group (NYSE: BX) and Wells Fargo (NYSE: WFC).
As for finance, GE is shrinking its finance arm, GE Capital, to a sliver of its former self. Barron’s reports that GE expects to sell $200 billion worth of real estate and consumer and commercial lending assets. This is in addition to the spinoff last year of its consumer financing arm into a new public company, Synchrony Financial (NYSE: SYF).
The focus moving forward will be industrial components: jet engines, locomotives, turbines, medical devices and energy production. This industrial core generated 57% of GE’s earnings in 2014. By 2018, this core is expected to generate 90% of GE’s earnings. Better yet, these businesses are expected to grow 15% annually through at least 2018.
But what does all this wheeling and dealing mean to shareholders? In short, value creation.
GE will put the influx of new money – up to $66 billion – immediately to work buying back shares. On that front, it has already committed to buy back $50 billion worth of its stock over the next couple years. The goal is to shrink the share count to 8 billion-8.5 billion outstanding shares by 2018. This is no small reduction. GE currently has 10.1 billion shares outstanding.
As the share count declines, earnings will be distributed over fewer shares. This means GE can easily re-establish itself as a perennial double-digit EPS grower. (I explained how this buyback alchemy works for Apple (NASDAQ: AAPL). You can read my account here.)
With double-digit annual EPS growth comes double-digit annual dividend growth. GE had a long history of annual dividend increases. The run ended in 2009, when the dividend was slashed 68%. The precarious financial position of GE Capital was the reason for the reduction. A reduced GE Capital reduces GE’s financial risk.
GE has clawed back since 2009, but its dividend is still below pre-crisis levels. This, too, could soon change.
GE is expected to return over $90 billion to shareholders, in share buybacks and dividends, through 2018. This means $40 billion will be returned through dividends. Over the previous four years, GE returned $32.8 billion to shareholders as dividends.
Investors should expect GE to return an additional $7.2 billion in dividends over the next four years. What’s more, these dividends will be distributed over fewer outstanding shares. With fewer shares and more dividends paid per share, it’s easy to see GE returning to its dividend aristocrat ways.

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