General Electric is No Longer Important
According to the U.S. Financial Stability Oversight Council, General Electric (GE) is no longer “systemically important” to the financial stability of the United States. This after GE announced yesterday that the company had sold its restaurant financing business.
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Over the last two years, GE has been working hard to transition away from financial markets. The goal has been to get back to the company’s roots as an industrial powerhouse.
To date, GE has sold $180 billion worth of financial assets housed under the GE Capital division. Selling these assets leaves GE with much less risk. Before, if a financial crisis hit and borrowers were unable to repay their loans, GE could have lost billions. But today, GE’s exposure has been dramatically reduced.
That’s great news for shareholders! Now, there is much less risk that another financial crisis will cripple this iconic manufacturer.
General Electric’s Stable Business
Volatile GE Capital now makes up a much smaller portion of General Electric’s business. That means future profits should be much more stable and predictable.
Wall Street analysts are currently expecting GE to earn $1.50 per share this year. And in 2017, the company should grow profits by 16% to $1.74. Those estimates seem reasonable, but if GE uses its cash to buy back shares of stock, earnings per share could come in significantly higher.
The bottom line is that investors should be willing to pay more for a company with stable earnings. We’re already seeing shares trade at a higher valuation as investors gain more confidence.
While shares trade at a premium (compared to years past), this valuation seems appropriate given GE’s reduced risk.
Cash Is Now Available for Shareholders
There is another major benefit to shedding the “systemically important” designation:
General Electric will now be able to spend more of its massive cash balance on dividends.
When the company released its first quarter report, GE held $9.3 billion in cash. This after spending $6.1 billion during the first quarter on share buybacks.
With such a large cash balance (and less risk from GE Capital assets), General Electric should be free to boost its dividend later this year.
Given the high PE ratio (above), I would be much happier if GE used its cash to boost dividends. It is hard to justify spending billions on share buybacks when GE is trading at a high valuation.
However, whether GE decides to focus on the dividend or on buying back shares, the stock should benefit. In today’s low interest rate market, it is difficult to find opportunities to generate stable income. GE’s 3.0% dividend yield is very attractive today. And the yield could soon increase sharply if GE decides to focus on its dividend over share buybacks.
General Electric is a great dividend stock, worth considering for your income portfolio.