General Electric's Dividend 'Machine' Will Continue Pumping

NEW YORK ( TheStreet) -- General Electric CEO Jefferey Immelt said "our portfolio is the best it's been in a long time," when speaking at a conference late last month, but analysts don't expect any third-quarter fireworks.

GE will reports its third-quarter results early Friday morning, with a consensus earnings estimate 36 cents a share, among analysts polled by Thomson Reuters, declining from earnings of 38 cents in the second quarter, but increasing from 31 cents during the third quarter of 2011.

GE Capital

During the second quarter, GE Capital -- which for some time was a major drag on the General Electric's earnings -- paid the parent company $3.0 billion in dividends. Morgan Stanley analyst Nigel Coe said on Sep. 30 that he expected GE's financial arm to become a "cash machine," because GE Capital's "Basel I Tier-1 Common Equity ratio compares favorably to US bank peers and assuming maintenance of a 10% CT1 ratio, we see potential for $30bn cash distribution through 2015."

That will lend quite a bit of support for General Electric in turn to increase its capital return to investors. The company last December raised its quarterly dividend by two cents to 17 cents a share, for a dividend yield of 2.97%, based on Wednesday's closing price of $22.91. During the second quarter, GE repurchased 45,592 shares at an average price of $19.25, and had $7.0 billion in authorized share buybacks under its current repurchase program, as of June 30. Coe expects to see $4 billion to $5 billion in share repurchases through 2015, but sees "further upside"

When asked during a meeting with analysts on Sept. 27 whether he might consider sales of "some chunkier assets" from GE Capital, Immelt said "we are not going to do things that are kind of premature or disruptive," and that the company didn't "feel desperate or feel like we need to make a big moves," but he did say that "things aren't sacred," and that there would be "more news later" about reductions in assets.

Total Revenue

Analysts expect GE to report third-quarter revenue of $36.935 billion, increasing from $36.501 billion the previous quarter, and $35.367 billion during the third quarter of last year.

Coe is ahead of the consensus, estimating third-quarter revenue of $37.150 million, with continued growth for all segments, except for GE Capital and Healthcare .

With Immelt continuing his strategy to "reduce the size of GE Capital and continue to get cash out of GE Capital," Coe estimates $11.463 billion in third-quarter revenue for the finance segment, increasing slightly from $11.458 billion the previous quarter, but declining from $12.018 billion a year earlier.


For the company's Energy Infrastructure segment, Coe expects to see revenue increase by 7% quarter-over-quarter and 18% year-over-year, to $12.804 billion. The analyst said that "on the back of the shale gas boom in the US, the outlook for gas turbine investment is a hot topic."

After GE announced $1.2 billion in orders for 19 of its 260-megawatt FexEfficiency gas turbines, GE CEO for Power & Water Steve Bolze said during the Sept. 27 meeting that the company was developing "a large block machine, which will be north of 300 megawatts. That will be the largest, most flexible, high-efficient machine in the world."

Bolze also said that "we see a gas cycle spanning the next 25, 30 years," and added in GE's Power & Water business, the company generates "more than 50% higher operating profit rates than our competitors. So, we continue to play through the cycle, sustain as well as grow market shares."


For GE's Aviation segment, Coe sees third-quarter revenue of $5.028 billion, increasing 4% from the previous quarter and from a year earlier, from "organic growth, representing slight acceleration from 3% in 2Q - driven by easing Military comps vs. last quarter."

David Joyce -- the Aviation segment's CEO -- said on Sept. 29 that the company was in a "very healthy" position for commercial aviation, with a "$19 billion of equipment backlog, and a $74 billion of services backlog." The "backlog of equipment is anywhere from 3 to 7 years depending on the engine model."


Coe estimates third-quarter Healthcare revenue of $4.325 billion, declining from $4.500 billion in the second quarter, and $4.332 billion during the third quarter of 2011. The analyst expects 4% organic growth in the segment going forward, "reflecting equipment growth in backlog."

During the Sept. 29 meeting, GE CE for Healthcare John Dineen said that "there are a lot of pressures right now in the environment, and some are positive and some are negative," and that the change in consumer demographics, with people "getting older and getting heavier," is "driving tremendous demand in the healthcare space."

Dineen said that GE was getting "a clean shot" at competing internationally, because "there are huge barriers to entry," and "limited protectionism." Investments in developing markets are "paying handsomely," with "a $4.5 billion business growing at over 20%. China has done like 10 quarters in a row over 20% for us."

Looking for a "Better Entry Point."

Despite calling the company a "strong cycle story" with management continuing "to press the right buttons on cost control and capital allocation, "Coe rates General Electric "Equal-weight," with a $23 price target, saying "the GE Capital shrink strategy limits the multiple we can pay for Capital earnings and with the stock close to our $23 target, we wait patiently for a better entry point."

GE's returned 31% year-to-date through Wednesday's close, following a 1% return during 2011.

GE Chart GE data by YCharts

The shares trade for 13 times the consensus 2013 EPS estimate of $1.74.

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

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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.