GE Earnings: Eye on Dividend

NEW YORK (TheStreet) -- General Electric(GE) is scheduled to report fourth-quarter earnings Friday, and investors and analysts alike will be looking for three stock catalysts: a reinstated dividend payment from GE Capital to the parent company, Europe's impact on the company's sales, and improvement in GE's industrial margins.

The stock would get a boost if GE would provide a definitive timeline for a GE Capital dividend, said Gabelli Equity Trust associate portfolio manager Zahid Siddique, while William Blair analyst Nicholas Heymann agreed, saying the news could provide a spark for the stock.

GE's fiscal 2011 dividend payout was about 60 cents, but could be much closer to $1 if GE Capital pays a dividend to the parent company, Heymann said.

Historically, GE Capital had provided a dividend that flowed up to the level of GE shareholders, but it was suspended after the financial crash.

When GE Capital is allowed to reinstate the dividend, though, remains a key issue. On the last quarterly conference call with analysts, GE CEO Jeff Immelt said the GE Capital dividend was a top priority for 2012, but acknowledged that the Federal Reserve must first approve the dividend. The Fed assumed oversight of GE Capital as a bank regulator during the summer 2011.

Analysts, though, see a silver lining related to the timing of the GE Capital dividend. "We were surprised to learn at the outlook meeting that GE Cap will pay a dividend for all of FY12, and not just the relevant quarter," wrote Sterne Agee analyst Ray Young in a report. "Thus, there is a scenario that the GE current 60-cent dividend could get an additional boost of $0.20 - $0.25."

During a recent investor day, General Electric officials said they would like the dividend to start in 2012, but didn't commit to that, Siddique recalled. Despite what happens with the GE Capital dividend, GE CEO Jeff Immelt said the company would raise its existing dividend in 2012.

Heymann said he anticipates that the earliest the GE Capital dividend will return is by the end of 2012. Barclays Capital analyst Scott Davis said the dividend could come in the second half of the year. Both analysts think that the Federal Reserve will wait for more information from Europe before the dividend is reintroduced.

Europe's impact on GE will be another hot topic during the company's fourth-quarter earnings call. One area that may see a decline is health care, Heymann said. The company has seen some market-share increases in Europe, but the analyst expects between 5% and 10% declines in 2012 sales for the division.

Barclay's Davis said the worst scenario for the health care division would be a decline of 10% in equipment sales. Immelt told Davis that that level could be reached in 2012. Health care was the fourth largest revenue and segment profit generator for GE in the third quarter with about $4.3 billion in revenue and $608 million in profit.

For comparison, Philips Electronics(PHG) CEO Frans van Houten noted in the company's fourth- quarter earnings update that, "our expected fourth quarter financial results have been affected by the weakness in Europe, which has impacted our healthcare business, as well as pricing in our consumer lighting business."

The company's health care division anticipates low single-digit comparable sales growth in the fourth quarter. The segment had a mid single-digit decline in sales in Europe in the fourth quarter. Philips' fourth-quarter earnings will come out on Jan. 30.

Heymann said that he didn't see reasons for analysts to "hold their breath" on GE's fourth-quarter earnings as "we already know that the industrial business is starting to generate organic growth." Also well-known, Heymann noted, is that GE is moving its mix of businesses more toward the industrial side and away from the financial business. Margin improvement, though, has remained a challenge for GE industrial units. In the third quarter, GE Capital had the largest revenue by division.

Analysts, on average, expect GE to earn 38 cents a share in the quarter on revenue of about $40 billion.

Tim Hoyle, director of research at Haverford Investments, said he expects GE's fourth quarter to be messy based on restructuring charges and a potential tax benefit in the financial division of the company. In fact, in the last quarter, GE beat the Wall Street consensus on the bottom line, but only because of tax issues, while industrial margins remained weak.

"We expect a somewhat messy quarter with a tax settlement gain in GECS," Barclays analysts wrote. "GE Industrial margins will remain under pressure as GE Energy sells through last year's low margin backlog."

Goldman Sachs analysts anticipate fourth-quarter revenue of $40.3 billion and EPS of 38 cents with 25 cents of that coming from the industrial portion of the business and 13 cents from GE Capital.

Heymann estimates GE will report EPS of 39 cents in the fourth quarter on $41.06 billion in revenue.

TheStreet Ratings gave General Electric a C+ and rated it a hold. GE's stock has risen 6.25% year to date.

-- Written by Alexandra Zendrian

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