GE: More Dividend Gravy, Please

NEW YORK ( TheStreet) -- General Electric ( GE) has been on a roll, and with GE Capital now contributing dividends to the parent company, investors are looking for continued rewards.

General Electric announced in May that its GE Capital (GECC) subsidiary would upstream a dividend of $475 million to the parent company in the second quarter, and target a dividends of 30% of the units earnings to the parent for 2012. In addition, GE is planning for GE Capital to pay a special dividend to the parent company of $4.5 billion this year. GE Capital's dividend to the parent was suspended during 2009, as the finance unit worked through the credit crisis.

GE will announce its second-quarter results early Friday, and the consensus among analysts polled by Thomson Reuters is for a profit of 37 cents a share, increasing from 34 cents during the first quarter, and also during the second quarter of 2011.

Analysts expect the company's total second-quarter revenue to come in at $36.8 billion, increasing from $35.2 billion during the first quarter, and $35.6 billion during the second quarter of 2011.

Jack De Gan, the chief investment officer of Harbor Advisory of Portsmouth, N.H., says that GE has "said that they will raise dividend going forward commensurate with earnings growth which means we can see a div increase before the end of the year of about 10%, probably after they upstream the extraordinary dividend from GE capital."

De Gan expects "there may be as much as six billion going upstream by the end of the year, which is going to allow the company to increase the shareholder dividend and fund some buybacks," since the company "would love to get the number of shares outstanding back to where it was before the credit crisis."

Following a strong first quarter, with organic revenue growing from a year earlier, De Gan is looking for a second-quarter growth rating "nothing more than a couple of percentage points lower than that."

GE said in its first-quarter earnings release that it expected industrial profit margins "to increase 50 basis points over the total year as businesses continue to implement productivity projects and recognize value gap improvements." De Gan says he "would like to see more progress this quarter, since meting their earnings expectation is partly based upon meeting another ½ percent of industrial margin."

Barclays analyst Scott Davis said on Monday that "sentiment on GE has clearly been reset higher since 3 months ago, on the back of the GECC dividend announcement," which he sees as "the first of several potential catalysts over the next few years that could lead to significant value creation for GE shareholders."

Just before the GE Capital dividend announcement in May, Davis said that the main catalyst for GE was "gas power generation," and added that the company's "high and rising dividend yield, material share repurchases likely in 2H12 (post Fed dividend decision), improving earnings quality, and de-risking at GE Capital (GECC) also provide tailwinds."

Energy Infrastructure

Davis estimates that GE's Energy Infrastructure business will show total second-quarter revenue of $11.5 billion, increasing from $11.2 billion the previous quarter, and $10.4 billion a year earlier, with energy revenue dipping 1% sequentially, but increasing 11% year-over-year, to $8.0 billion, while estimating that oil and gas revenue will increase 9% quarter-over-quarter and 11% year-over-year, to $3.8 billion. The analyst said on Monday that "Current economics (let alone EPA mandates) support coal to gas switching and we are beginning to see this in the data," as "Electricity generation in the US from natural gas sources is now up over 40% y/y and has been pacing at this run-rate for several months." Barclays believes that GE's "turbine service revenues will grow at least 10% annually (at a 40%+ margin) over the next 3 years."

Davis estimates that the Energy Infrastructure business's second-quarter profit will be $1.7 billion, increasing from $1.5 billion the previous quarter, and $1.6 billion a year earlier.


Morgan Stanley analyst Nigel Coe estimates that for GE's Aviation Division, second-quarter revenue will increase to $5.0 billion, from $4.9 billion in the first quarter, and $4.7 billion in the second quarter of 2011, but on Monday expressed concerns that second-quarter "Major Equipment orders could be down mid single digits, driven by tough comps."

Coe said that "GE has formally announced orders for only 100 engines vs. 250 in 2Q11 (although this is a step up from 40 in 1Q12)," although he added that "this can probably be described as a timing issue; the Farnborough Air Show (when many aerospace companies announce large contracts) fell into 3Q12, whereas the corresponding Paris Air Show fell into 2Q11," and that "last year's results were significantly aided by the A320neo program announcement, which provided GE with a number of new orders for the Leap-X engine."

Morgan Stanley estimates that the Aviation division's second-quarter profit will be $965 million, increasing from $862 million the previous quarter, and $959 million a year earlier.

GE Capital

Coe estimates that GE Capital's second-quarter revenue will be $11.7 billion, increasing from $11.4 billion in the first quarter, but declining from $12.4 billion during the second quarter of 2011. The analyst estimates that the finance segment will show a second-quarter profit of $1.8 billion, declining slightly from the previous quarter, but increasing from $1.6 billion a year earlier.

Coe said that Morgan Stanley's "lies in the potential for increasing loss provisions, driven by increasing delinquency ratios in Europe," with "32% of total financing assets" originated in Europe, according to GECC's most recent 10-K filing.

The analyst also said that "loss provisions look low from a historical standpoint, suggesting an upside bias in the event of a delinquency pick-up."

GE's shares closed at $19.82 Wednesday, returning 13% year-to-date, following a 1% return during 2011.

GE Chart GE data by YCharts

The shares trade for 11.5 times the consensus 2013 EPS estimate of $1.73. The consensus 2012 EPS estimate is $1.54.

Based on a 17-cent quarterly payout, the shares have a dividend yield of 3.43%.

Coe on Monday lowered his rating for General Electric to "Equal-Weight" from "Overweight," with a price target of $22, saying that "we move to the sidelines for now in light of recent outperformance and GE's premium valuation ex- GECC," adding that "we continue to view GE as an attractive cycle and cash story, but key catalysts " are "likely 2013 events."

Davis on Monday left his rating for GE unchanged at "Overweight," with a $22 price target, and said that "a sector-high dividend yield and a bullish view on US gas powergen tip us in favor of an Overweight rating on the stock," and that "potential catalysts include powergen orders picking up, further share repos, corporate dividend announcements, and potential portfolio actions."

Interested in more on General Electric? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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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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