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There's much to like about the retooled GE, which seems to have managed to shrink its liabilities while maintaining growth potential, writes Josh Peters of Morningstar DividendInvestor

General Electric (GE) avoids the typical conglomerate form by combining businesses with strong synergies and opportunities for information sharing across business lines.

Add GE’s ability to invest large amounts of money in expanding businesses, and virtually any barrier to enter a new market is significantly lower. With its legendary knack for squeaking out operating efficiencies, the firm is able to generate healthy returns on invested capital in many of its markets.

By focusing its efforts on the most value-added components, GE is able to remain relevant with customers and focus its research efforts on projects for which clients will be willing to pay the most.

GE’s collection of late-cycle businesses is poised for growth over the next several quarters, as capital-goods orders materialize into shipments. In addition, we think GE’s position on next-generation, narrow-body aircraft sets the stage for healthy profitability over the next several years.

Through acquisitions, it is clear that the revamped General Electric will focus more heavily on oil and gas power generation, including renewable energy.

In a move repeated by many of the diversified manufacturers that Morningstar covers, GE shifted its growth focus from acquisitions to heavy research and development, giving it one of the strongest new product portfolios in recent memory. The management team has done a noble job shrinking the size of the business while maintaining the long-term earnings integrity of GE Capital.

Although GE’s once-sterling reputation was besmirched by a 68% dividend cut in early 2009, the stain has started to fade. With the 2 cents a share increase (11.8%) announced December 14, the quarterly dividend rate has now rebounded 90% from its 2009 nadir.

We credit a renewed emphasis on GE’s industrial units, as well as a vastly improved liquidity position at GE Capital Services (GECS). While the most recent dividend hike fell short of our expectations of a 3 cents per share boost, this result makes sense in light of continued economic instability around the world.

GE targets a dividend payout ratio of 45% to 50%, with dividends rising roughly in line with earnings per share over the long run. Based on the consensus EPS estimate of $1.70 for 2013, GE’s payout looks to land at 46%.

In conjunction with the announced dividend increase, the company also earmarked another $10 billion of share repurchases, bringing its total buyback authorization to $14.9 billion between September 30 and the end of 2015. If executed at the current price, this spending could retire as much as 6.5% of outstanding shares, a dynamic that we expect will contribute to future dividend increases.

These buybacks also afford GE the flexibility to slow or halt the spending in the event of another adverse economic or market event, or possibly if the firm decides to pursue a large industrial acquisition.

While GE’s results have been and will continue to be affected by economic conditions, we are quite pleased with the progress the firm has made on key strategic priorities since 2009—shrinking the GECS balance sheet, resuming dividends from GECS to the parent company, shifting capital toward its industrial businesses (particularly in energy), producing abundant cash flows, and raising the dividend.

From here, we expect long-term per-share dividend growth to average 7% to 9% annually, and we think the shares are attractive for income investors at a 3.4% yield.

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Tickers Mentioned: GE

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