Sunday, November 20, 2005

Dividends Talk -- GE -- What More Can They Say?

GE announced a 14% dividend hike last week. As usual the news of this hike was like a piece of juicy gossip. It traveled all around the world before Chairman, Jeffrey Immelt, could get the whole sentence out of his mouth. **Not** No, the truth is the news of the dividend hike did not even make some financial websites that I watch. And yet, in the few words it took to announce the hike, GE said more about the coming year than a stack of Wall Street research reports. Before I discuss the implications of GE's dividend action, let me show the blog I wrote on December 13th of 2004. December 13, 2004 So goes GE . . . . GE's announcement of a 10% hike in its dividend this week is very good news. GE has long been a bellwether of the US economy, and the double digit increase is a plus not only for GE, but also for the entire US economy and stock markets. CEO Jeffrey Immelt also announced future earnings growth in the range of 10-15%%. We believe this guidance says three things: 1. Earnings will grow faster than 10%, 2. Dividends should also grow at least at 10%, and 3. Average US profit growth should be also close to 10% over the next few years. More importantly, GE's dividend and earnings growth pronouncements allow us to compute its intrinsic value. Starting with a dividend of 86 cents,growing at 10% per annum over the next five years then gradually slowing it to a long-term growth rate of 6.0%, all discounted at 9%, produces an intrinsic value of just under $42.00. We think its just a matter of time before the stock trades there. It is currently trading at $37.26. This is the best news on dividends I have seen in a long time. GE is so big and so important to our economy that their guidance sheds a light on the whole economy. Well done Mr. Immelt. GE had been wallowing around ever since Jack Welsh left the throne, and the 10% hike, to me, was a clear indication that Mr. Immelt was signaling that things were about to get better. With regards to the three things I said the dividend hike was implying, (1) GE's earnings, indeed, will be above 10% for 2005, at near 13%;(2) The 10% 2005 dividend hike is now being followed by a 14% increase for 2006 (I continue to think 10% will be a floor for the next several years); and (3) US corporate earnings growth will be near 14% for 2005, well above my projection of 10%, which was 50% higher than Wall Street consensus estimates. The only part of the December 2004 blog that has not come to fruition yet, is GE's price. I said in the December blog that our dividend model was producing a present value of $42.00 for GE. Well, not only is GE not trading at $42 per share, it is actually trading at $36 per share, lower than it was last December 2004. If you are a momentum investor, you don't care a twit about talking dividends, or valuation. You care only about price, and "what have you done for me lately." But if you are a dividend-value investor, you know that prices and values can disconnect for long periods of time, but sooner or later GE is going to not only trade at $42 per share, but it will also trade at $47.00, which is what our dividend model says it is now worth. In my judgment, GE is the most important company in the United States. They are very large and so diversified that they are a bit of a microcosm of our entire economy. If GE is upping its dividend and earnings targets for the coming year and thereafter, I believe it is unwise to be too pessimistic about future economic and profit growth for the whole country . The terrorists cannot stop our economy, the hurricanes cannot stop our economy, even the blood sport that the politicians are playing cannot stop our economy. A year ago the best clue we could have used to tell us the shape of things to come was GE's dividend hike. I think you can do the same today. The only difference is I strongly believe GE's price will catch up with its valuation over the next 12 months.