NEW YORK ( TheStreet) -- The big questions investors have about General Electric ( GE) remain the same: What's going on at GE Capital, and when will they raise the dividend?

So far, 2010 has been a ho-hum year for the stock with Wall Street concerned about the potential impact of both healthcare policy changes and the coming financial reform legislation. Uncertainty about credit costs and a slow overall revenue growth rate have also held the shares in check.

As it happens, this month marks the one-year anniversary of the company's decision to lower its quarterly dividend to 10 cents a share from 31 cents a share. Although the shares are still yielding 2.68% even with the lower payout, the prospect of beefing up the dividend is always a hot topic on the company's conference call.

Last quarter, CEO Jeff Immelt said GE wanted "to grow the dividend in line with earnings in 2011" so analysts will be looking to extrapolate whatever they can from any outlook updates, although the company isn't likely to give them much to go on.

As of March 31, GE had $69.6 billion in cash and equivalents, and Sterne Agee analyst Nicholas Heymann said in a recent report that he believes GE could move to lift the annual dividend to 50 cents a share for 2011 once it retires roughly $3 billion in preferred stock; a move that is expected to occur later this year.

Heymann says GE typically reviews its dividend policy in November, so investors may have to sit tight until then.


The average estimate among analysts polled by Thomson Reuters is for GE to report second-quarter net income of 27 cents a share, which would be an improvement from 21 cents a share in the first quarter, but just a penny ahead of the second quarter of 2009.

Morgan Stanley analyst Scott Davis's estimate for second quarter earnings is 26 cents per share, and he has an "Overweight" or "Buy" rating on the shares, with a twelve month target of $22, which would be roughly a 45% premium to Wednesday's close at $15.20.

Davis expects continued strength in the company's healthcare division -- where first quarter profits increased 21% year-over-year to $497 million - and stabilizing credit trends in GE Capital will offset weaknesses in the Aviation, Transportation and the GE Real Estate divisions.

Sterne Agee's Heymann estimates second-quarter earnings a bit lower at 24 cents, and he's got a neutral rating on the shares. He says GE shares are trading at roughly a "10% P/E premium" to the overall market based on his firm's average earnings per share and projections for 2009 through 2011.

The company has a streak of five consecutive quarters of earnings beats on the line with this report. On average, profits have come in 16% ahead of Wall Street's consensus view over that period, according to data from Thomson Reuters. The biggest beat was in the latest first quarter when GE's 21-cent per share profit topped the average analysts' estimate by a nickel.

For this latest quarter, analyst earnings estimates range from 24 to 28 cents a share.


The average projection among analysts is for second-quarter revenue of $38.5 billion, improving from $36.6 billion the previous quarter but trailing the second quarter of 2009, when revenue reached $39.1 billion.

Last Thursday Deutsche Bank reduced its second-quarter revenue estimate by 3% to $37.9 billion, citing the negative impact of a stronger U.S. Dollar on GE Capital and a lowering of the firm's industrial forecasts. Deutsche Bank has a "Hold" rating on the shares and a $19 twelve-month price target.

Morgan Stanley's Davis expects bright spots for revenue will be the Energy Infrastructure division, for which he is projecting an increase to $10.3 billion from $8.7 billion in the first quarter.

That figure is down a bit, however, from the division's $10.5 billion total in the year-ago second quarter, with wind equipment orders in the latest period looking soft compared to last year.

Overall, analyst revenue estimates currently range from $37 billion to $40.2 billion for the June period.

Stock Performance:

Based on Wednesday's close at $15.20, GE shares were up incrementally for the year, but had gained around 24% in the last 52 weeks. The stock has pulled back sharply along with the broad market in the past three months, and it's now off 21% from the 52-week high of $19.20 it set on April 30.

At current levels, the shares are trading at 11.5 times the current Wall Street consensus estimate for earnings in 2011.

Analysts are mildly positive about GE headed into this report. Of the 14 covering the company, two have strong buy ratings, six are at buy, and six are at the equivalent of hold. The median 12-month price target of the analysts covering the stock is $22, however; a fact that would seem to indicate just about everyone thinks the stock is severely undervalued. They just don't know when it's going to make a move because so much depends on the economic recovery.

Sterne Agee's Heymann, who lowered his price target on GE to $19 from $22 on July 8, and hinted at this in the accompanying research note: " W e believe that GE's shares are widely considered increasingly attractive, except for the hard-to-quantify macro factors that impact GE's diverse operations perhaps more than most industrial operations."

GE Capital:

While questions about the timing of a dividend increase probably seem pesky to CEO Jeff Immelt (pictured above), intense scrutiny of GE Capital is likely par for the course by now.

The general consensus among analysts that the financial unit is turning the corner on credit quality. While Deutsche Bank analyst Nigel Coe said "a greater degree of caution" was appropriate for GE Capital's portfolio because of its "over-weighting to late cycle commercial finance and real estate markets," his firm was assuming that credit losses had already peaked and would total a projected $8.5 billion for 2010, down from $10.9 billion in 2009.

Coe estimates loan losses of $7.3 billion in 2010, eventually trending down to an annual $4 billion.
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Why Financial Reform Will Hit GE

According to GE Capital Credit Card Master Note Trust filings for the month ended May 21, the 30+ day delinquency rate for securitized credit card balances was 4.98%, a slight increase from the previous month. GE's May 21 delinquency rate slightly exceeded the 4.92% average as of May 28 among the commercial banks with major credit card operations, including Citigroup ( C), JPMorgan ( JPM), Bank of America ( BAC), Capital One ( COF), American Express ( AXP) and Discover ( DFS).

GE Capital's annualized charge-off (loss) rate for the securitized card portfolio was 10.49%, which was ahead of the 9.54% average loss rate for the major credit card lending banks, according to SNL Financial. Bank of America had the highest loss rate among the group in May, 13.33% and American Express the lowest, at 7.75%.

Over the next several quarters, GE and especially GE Capital will face a litany of regulatory challenges, not only from domestic healthcare reform and financial reform legislation, but from international regulations, which may include increases in required capital ratios,

According to Coe, the Basel III capital guidelines that are expected to be released in 2011 "will almost certainly require wholesale fincos like GE Capital to boost capital ratios." While Deutsche Bank was expecting GE's retained earnings to be sufficient to comply with increased capital guidelines for GE Capital.

-- Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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