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March 17, 2010 - General Electric Co. (GE-NYSE) announced it will raise the dividend in 2011. It's currently at 40 cents a share, paid quarterly in 10 cents per payment. It used to be $1.24 cents a share, but that was pared to 40 cents in early 2009, the first dividend cut since the depression of the 30's. So if you don't own GE why should you care?
Because GE is a good surrogate for the economy, and when GE feels confident enough to raise the dividend, it means, most likely, the whole economy is doing better. GE makes refrigerators, jet engines, light bulbs, locomotives, gas, steam and aero derivative turbines, generators, healthcare products such as diagnostic imaging systems and eletrical equipment, among many other products and owns NBC Universal and GE Capital. It's everywhere, globally as well as market sectors. And it's in the biggest markets, ones where huge purchases are made only when companies have strong beliefs that end demand will justify large cash outlays for new equipment. When GE says it will increase the dividend (and also predicts better earnings in 2011), it means economic activity is picking up. As the CFO of GE, Keith Sherin, said on March 16: "We have very good visibility around our cash flow ... If you think about 2011 for us, we believe we're going to have earnings growth. We plan to resume growing the dividend again in 2011." Analysts see 2010 profit at 99 cents a share, then forecast $1.24 for 2011. One analyst sees profits doubling to $2.00 a share by 2013.
Companies don't raise dividends (or announce dividend increases) unless they are completley confident they can continue to pay them. Income investors make decisions based on dividends. They buy stocks that show ever increasing payouts or at the very least that keep dividends constant. If a company raises a dividend, then cuts it shortly thereafter, many investors will sell the stock because the only reason they own it is for the income. When they sell, the stock price gets hit. That was certainly the case for GE when it cut the payout in early 2009. The stock went from $17 to $6 in a matter of weeks. Since that low of March, 2009, the stock has slowly moved higher. When the company announced an increase in the dividend the stock improved over 3% in one day. Dividends matter. They give shareholders cash flow, a return on their investment. When a major company like GE begins to increase its dividend, all investors should take notice. The higher payout signals a new confidence in the economy. While government data doesn't suggest a recovery yet, the GE announcement implies that the data it's gathering in terms of sales, says that better times have started, and that 2011 and beyond will show improved earnings. Better earnings give room for higher dividends. - Ted Allrich |
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