Why You Should Finally Trust GE’s Dividend Again

Once bitten, twice shy. That’s the attitude that investors tend to take with companies that slash or eliminate their dividends, and with good reason. If you are buying a stock with the intention of using the dividend to pay your living expenses, a dividend cut can take a wrecking ball to your retirement plans.

So it is that income investors fell out of love with iconic American blue chip General Electric (GE). During the pits of the financial crisis, with the venerable old company had to go begging to Warren Buffett for cash, GE cut its quarterly dividend from $0.31 to just $0.10 in early 2009.

Now, I certainly understand why GE did it. When you’re in bad enough financial shape to justify paying Mr. Buffett a 10% perpetual preferred-stock dividend, it makes prudent business sense to cut the common dividend. But income investors have long memories, and many are going to find it hard to trust General Electric with their retirement again.

But now that more than six years have passed since GE took a machete to its payout, I can say that it’s finally safe to trust GE’s dividend again.

Let’s dig into the details. At a current dividend yield of 3.7%, GE is one of the highest-yielding stocks in America outside of “traditional” income sectors like utilities, telecom, or tobacco. The GE dividend, at $0.23 per share, is still well below its old pre-crisis high of $0.31. But to GE’s credit, the company has raised its dividend by 130% since 2009. So GE has clearly made it a priority to reward its long-suffering shareholders with solid dividend hikes.

Over the past five years, GE has raised its dividend at an 11% compounded annual clip. And there is every reason to believe the dividend is safe for the foreseeable future. General Electric’s dividend payout ratio, at just 45%, is near the bottom end of its range of the past five years.

But the real reason to have a little faith in GE’s dividend is that this is a very different company than the one that slashed it back in 2009. Pre-crisis, GE had essentially morphed into an enormous Wall Street bank that also happens to run an industrial business on the side. In fact, the U.S. regulators deemed it a “systemically important financial institution” due to the size and scope of GE Capital’s operations. As recently as two years ago, GE Capital, as a standalone institution, would have been the seventh-largest bank in America.

All of that changed earlier this year. Back in April, GE made the decision to essentially dump GE Capital as a way of getting out from under the regulators’ thumb and finally putting the legacy of the 2008 meltdown behind it. This is a big deal, as GE Capital has long been the biggest driver of GE’s profit… as well as its biggest source of risk. It was GE Capital’s shoddy investments during the housing boom and bust that nearly buried the company.

Yet getting rid of it has been hard. GE Capital accounted for 30 percent of GE’s annual revenue over the past four years but fully 51 percent of its after-tax income. GE has been trying to shrink GE Capital for years and replace the lost revenues with growth in its industrial business lines, but the reorganization hasn’t been particularly easy. Corporate-wide revenues are still down by nearly a quarter from their pre-crisis highs, and gross margins are down about 40%. But as it has become a slimmer company, GE has also managed to trim back its risk profile. Its long-term debt outstanding has shrunk from $322 million in 2008 to just $185 million today.

All in all, the post-GE-Capital General Electric will be a far less risky, albeit less profitable, industrial conglomerate. It’s not all wine and roses for GE going forward, and there will always be risks with which to contend. Just earlier this year, GE had to slash spending and headcount in its energy unit as the plummeting price of crude oil has reduced the need for new equipment.

But overall, with GE Capital on the way out, GE is now pretty well shorn of the sort of “black swan” risk that could bury the company. That might make it a little less interesting as a growth story. And in fact, I’m somewhat on the fence myself as to whether GE is attractive at current prices. But if nothing else, the shift away from GE Capital makes it a lot more attractive as a safe dividend stock.

Disclosures: None