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Update General Electric in my Dividend Income portfolio
04/20/2012 4:00 pm EST
Earnings per share of 34 cents beat Wall Street projections by a penny. Revenue was up by 4% year to year (after accounting for the company’s sale of NBC Universal) to $35.18 billion versus the $34.7 billion Wall Street consensus. Sales of industrial equipment and energy infrastructure, the two drivers of growth in the post-financial crisis, were up 11% and 13%, respectively, for the quarter over the first quarter of 2011.
But most importantly for dividend investors—and I added General Electric to my Dividend Income portfolio http://jubakpicks.com/ on February 3, 2012—at GE Capital profits grew by 27% (after accounting for divestitures) to $1.8 billion. The Tier 1 capital ratio for GE Capital hit 10.4%. And in its conference call, the company said that, subject to approval from the Federal Reserve, it expects that GE Capital will resume paying a dividend (to General Electric) in the second half of 2012. Even after increasing its dividend four times, General Electric still pays only about half of the quarterly dividend it paid before the financial crisis. General Electric cut its dividend to the bone in 2009 to preserve capital at GE Capital as the financial crisis worsened.
Outside the GE Capital story, the best news in this quarter’s earnings report came on margins in the industrial and energy business that is the core of the reorganized General Electric. (GE Capital, which was the source of more than half of revenue before the financial crisis now contributes “just” 30%.)
Although margins in the industrial segment as a whole fell in the quarter, they were up in the Healthcare and Transportations part of that segment. New orders showed a 0.5 percentage point improvement in pricing in four out the five units that make up the Industrial segment. In its conference call the company said it expects to see margins for the segment as a whole to expand by 0.5 percentage points for the full year.
In the energy infrastructure segment margins fell as expected but not by as much as expected, declining to 13.6%, down 1 percentage point from the fourth quarter. That was a marked improvement from the 3.2 percentage points drop in margins in the fourth quarter and indicates that this business is recovering and that the company’s investments in productivity are paying off.
I think $23 a share is a reasonable 12-month target price for this stock. (Shares were trading at $19.40 at 2:30 p.m. New York time on April 20.) And do remember the current 3.5% yield and the likelihood that investors will see another dividend increase in the second half of 2012.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of General Electric as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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