General Electric (NYSE:GE) reported Q1 2021 results on Apr. 27. While its adjusted profits were two cents better than analyst estimates, it missed the top-line consensus by $420 million. That news pushed GE stock lower.
However, despite a mixed quarter, I see a company that looks ready to again become the dividend grower that it was for so many years before — the company General Electric was until it cut its dividend to just a penny back in December 2018.
Here’s why I feel this way about GE stock.
GE Stock: Free Cash Flow Is Getting Stronger
As any investor worth their salt knows, a company pays its dividends from excess cash. As such, those names that generate healthy cash flow have no problem increasing their dividends from year to year.
At the height of its dividend-paying glory in 2008, GE stock paid out $1.24 (split-adjusted) in annual dividends. It’s never been that high since. In that fiscal year, its industrial businesses had cash flow from operating activities of $19.1 billion (Page 75). After subtracting $3 billion in capital expenditures, its industrial business had free cash flow (FCF) of $16.1 billion. In 2020, GE’s four industrial businesses generated FCF of $606 million, down from $2.3 billion in 2019 and $4.8 billion in 2018.
In 2008, its industrial businesses generated almost 27 times as much FCF as they did in 2020.
In the first quarter of 2021, the industrial businesses had FCF of -$845 million, 62% higher than a year earlier. That’s still not positive, but considerably better than it was at this point last year. On the results, CEO Larry Culp noted:
“I am proud of the GE team’s solid first quarter results, despite a still difficult environment for Aviation. We are improving our cash performance and profitability with Industrial free cash flow growth of $1.7 billion year-over-year.”
In the results, the company also reiterated its full-year outlook for 2021, stating that GE Industrial’s FCF will be between $2.5 billion and $4.5 billion. That’s a 313% increase over 2020 at the low end of its FCF estimate and a 643% increase at the high end.
To get back to $1.24 in dividends paid out annually, GE would have to generate approximately $10.9 billion (8.8 billion shares outstanding multiplied by $1.24) in FCF to accommodate such a payment. So, clearly, this is not going to happen in 2021 or even 2022. However, it could happen in 2023 if Culp’s plans gain further traction and the company’s FCF continues to strengthen.
GE and Its Current Dividends
Anyone who’s been a long-term GE stock shareholder must find it difficult to see the current dividend yield at a meager 0.3%. This low yield is part of the price that had to be paid for Culp to accelerate debt repayment. Since the end of 2018, GE has reduced its debt by more than $70 billion.
This alone makes Culp’s tenure a success. However, it is the CEO’s decentralization efforts that will determine the company’s future. A lean organization that’s closer to the customer ought to help reignite GE’s growth engine.
When you consider the fact that this company’s Power and Renewable Energy segments accounted for about 43% of $16 billion-plus in industrial revenue in Q1, but neither made a profit, the upside is actually quite promising from an overall earnings perspective.
If both of these segments had 5% profit margins in Q1 2021, you’re talking about a $358 million profit on $7.1 billion in revenue rather than a $321 million loss. That’s a turnaround of almost $700 million.
Based on 8.8 billion shares outstanding, that $700 million equates to about eight cents a share in potential dividends that GE could have paid out. I realize this is only theoretical, but imagine how much GE stock would jump on news that it was increasing its quarterly dividend by 700% — from just a penny to eight cents per share.
All I know is this would be significant.
The Bottom Line on GE Stock
I recently recommended GE stock as one of 10 dividend stocks to buy under $25.
Part of my rationale for doing so was GE’s sale of GE Capital Aviation Services (GECAS), the company’s aircraft leasing business, to Aercap (NYSE:AER) for $24 billion in cash and 46% of the combined company. I wrote on Mar. 31:
“Culp believes the deleveraging and de-risking of its balance sheet puts the company in a better position to focus on its other operating segments. As stated in the press release for the AerCap sale, the ‘deal marks GE’s transformation to a more focused, simpler, and stronger industrial company.”
I agree with that sentiment still. Returning to its roots ought to get GE back in the good graces of dividend investors everywhere in due course.
In the meantime, take advantage of any volatility on the downside, buying GE stock in the $12 range or even lower. This time next year, we might not be able to include General Electric in a discussion about dividend stocks to buy under $25.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.