GE Sees Path to Restore Dividend Growth as Economy Aids Sales
January 23, 2010, 12:06 PM ESTBy Rachel Layne
Jan. 23 (Bloomberg) -- General Electric Co. said improving economic conditions and reduced costs are giving it flexibility to consider using cash for acquisitions and eventually for stock buybacks and dividend increases.
“This is painting a picture of the future,” Chief Financial Officer Keith Sherin said in an interview. Given “dramatic changes we’ve made in the company in the past 18 months, the future outlook looks pretty good.”
GE yesterday reported fourth-quarter earnings and sales that beat analysts’ estimates, with all GE Capital units other than real estate reporting a profit. Options for cash use may open up as the industrial divisions benefit from expanding economies this year and from cost savings made over the past year, Sherin and Chief Executive Officer Jeffrey Immelt told investors.
The world’s biggest maker of jet engines, locomotives and medical-imaging machines said profit from continuing operations fell 22 percent to $3.03 billion, or 28 cents a share, from $3.87 billion, or 36 cents, a year earlier. The average estimate was 26 cents a share in a Bloomberg survey of 13 analysts. Sales fell 10 percent to $41.4 billion, GE said in a statement.
Fairfield, Connecticut-based GE rose 9 cents to $16.11 yesterday in New York Stock Exchange composite trading, while the Dow Jones Industrial Average dropped 2.1 percent. GE fell 6.6 percent in 2009.
GE’s industrial operations generated $16.6 billion in cash by the end of 2009 and this year expects about $10 billion from the sale of a majority stake in NBC Universal as well as a security unit.
Rebuilding Capital
“GE will want to see one year of kind of rebuilding capital,” said Mark Demos, who helps manage $19.8 billion at Fifth Third Asset Management in Minneapolis. “I think they want to build a good backlog in their infrastructure businesses and then you can maybe look for that in 2011 as they start to build cash.”
A global recession and credit crunch prompted GE to preserve cash as credit losses mounted at GE Capital. The company in September 2008 suspended its share buyback and last year reduced its annual dividend for the first time since 1938. Even with those steps, GE lost the highest-possible credit ratings from Moody’s Investors Service and Standard & Poor’s.
The company yesterday said global orders were starting to pick up in businesses including health care. GE benefited from an improved U.S. economy, which expanded in the third quarter at a 2.2 percent annual rate, the Commerce Department said last month. Gross domestic product shrank 3.8 percent in the 12 months to June, the worst performance in seven decades.
Equipment Backlog
GE said its backlog of equipment and service orders rose about $1 billion to $175 billion in the fourth quarter and that it may have about $25 billion at the end of 2010 after the NBC and security-unit transactions.
GE may not need as high a cash balance at GE Capital from a “liquidity and safety perspective” as operations become more normal, Sherin said. Instead of the current level of about $62 billion, the unit may eventually run with $40 billion to $50 billion, he said. Immelt is shrinking GE Capital’s assets.
The finance unit has already raised enough capital to fund debt coming due this year and has sold $4.4 billion of the debt it expects to refinance in 2011, the CFO said. GE Capital said in December it expects to “prefund” about $20 billion to $25 billion of 2011’s debt this year.
The company may ultimately end up with about $15 billion to redeploy on dividends, acquisitions and buybacks, Steven Winoker, a New York-based analyst with Sanford C. Bernstein & Co., wrote in a note yesterday to investors.
Potential acquisitions should range in price “from a couple hundred million to a couple billion,” Immelt said on a call with analysts after the earnings report. Any acquisition has to have a 15 percent return on cash within five years, he said.
“We always look at bolt-on acquisitions and infrastructure” and GE will be “very opportunistic” regarding a buyback, including one of preferred shares, Immelt said. “We really see the ability to grow the dividend in line with earnings by 2011.”
--With assistance from Will Daley and Thomas Keene in New York. Editors: Kevin Miller, Kevin Orland
To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net
To contact the editor responsible for this story: Kevin Miller at kmiller@bloomberg.net
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