Analysis: GE bangs dividend drum, but constrained by Fed

BOSTON Fri Jan 20, 2012 6:13pm EST

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BOSTON (Reuters) - After years of seeing General Electric Co's (GE.N) shares lag the market, Chief Executive Jeff Immelt finally has a plan to win over shareholders - but first he has to win over the Federal Reserve.

The head of the largest U.S. conglomerate wants to reward investors by boosting its dividend and buying back shares, but he must persuade the Fed, which now oversees GE Capital, to allow the finance arm to start returning its profit to the parent company.

Directly rewarding shareholders through further dividend hikes and stock buybacks is a top priority for GE, even taking precedence over acquisitions, Immelt told Wall Street on a conference call following quarterly earnings on Friday.

"We have a $200 billion backlog. We don't need acquisitions," said Immelt, who has run the Fairfield, Connecticut-based company for more than a decade. "So I think the emphasis on dividend, reducing the float over time, those take a very high priority."

GE, the world's largest maker of jet engines and electric turbines, has already raised its dividend four times for a total of 70 percent and bought back $3.8 billion of shares since July 2010, when it started to emerge from the defensive crouch it had assumed during the financial crisis.

But those moves have not helped break the stock out of its long torpor - GE shares trade at less than half the value they had in September 2001, when Immelt took the reins from storied predecessor Jack Welch. The share performance has been the most consistently criticized aspect of Immelt's tenure.

GE will be able to raise its payout further if the Fed allows GE Capital - which accounted for 32 percent of 2011 earnings - to resume paying a dividend back to its parent company. GE historically received a dividend from its finance arm, but halted that practice in the fourth quarter of 2008, when the business was hard-hit by the global credit crisis.

The Federal Reserve became GE Capital's regulator in July 2011, as a result of changes following the financial crisis.

Immelt's focus on dividends and buybacks sounded to some institutional investors like a direct appeal to the individual investors who hold about 40 percent of GE shares.

"I'm a little afraid that they're pandering," said Peter Sorrentino, a senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, which holds GE shares.

"The problem I have is that if you're doing that you're running out of growth opportunities and that's an attempt to divert people away from, 'Hey, it's a very competitive environment, our revenue number isn't what we thought it would be and oh by the way, here's a bag of candy. Hope you're happy.'"

GE SEES 'CONSISTENT MESSAGE'

GE executives bristle at the idea that boosting the payout and buybacks could harm long-term growth prospects and note that in 2010 and 2011, GE made an $11 billion wave of acquisitions to boost its presence in the energy sector, a business that notched 19 percent revenue growth in the fourth quarter.

"Over the last two-and-a-half years we've tried to work with investors to formulate this capital allocation prioritization," GE Chief Financial Officer Keith Sherin said in an interview. "The focus on the dividend and the prioritization around balanced allocation between M&A and buybacks, reducing the float over time, it's been a very consistent message."

The company aims to pay out 45 percent of its profit to shareholders in dividends, but continues to invest heavily in growing its own businesses -- both at its division and at five research labs around the world, Sherin said.

GE still has board approval to buy back up to another $7.8 billion in shares -- which would represent almost 4 percent of GE shares at current prices. But analysts are skeptical that will make a meaningful impact on the stock price, which stood at $19.15 at Friday's close on the New York Stock Exchange.

"The real key is when will they get the green light to restart the historical dividend back to the parent?" said William Blair & Co analyst Nick Heymann. "Then, instead of a 68 or 75 (cent per share annual payout) you could go to like a buck, and that would change more meaningfully than the earnings outlook the prospects for the valuation of the shares."

WAITING ON THE FED

GE's dividend yield of 3.6 percent is higher than many of its peers. United Technologies Corp (UTX.N) has a 2.5 percent dividend yield, while Honeywell International Inc's (HON.N) is 2.6 percent and Caterpillar Inc's (CAT.N) is 1.7 percent.

GE has the fifth-highest dividend yield in the 30-member Dow Jones industrial average .DJI. AT&T Inc (T.N) has the highest dividend yield in the group at 5.8 percent and Bank of America Corp (BAC.N) has the lowest at 0.6 percent.

"We wanted to do the dividend starting with the year and as a result of being with the Fed we haven't been able to do that," Sherin said on Friday, when GE disclosed fourth-quarter revenue that missed Wall Street's expectations. "Our goal is to do the dividend in 2012, we haven't changed that goal."

GE is not alone in receiving scrutiny from the Fed, which started to review its request on GE Capital last July.

Last year, Bank of America asked the Fed for a modest increase to its quarterly dividend of a penny per share but was rebuffed. On Thursday, the bank's CFO, Bruce Thompson, told reporters that BofA did not seek permission to increase its dividend or buy back its own stock this year.

A Bernstein Research analysis released earlier this month suggested that GE Capital would "comfortably pass" the Fed's tests to determine whether it could resume paying a dividend to its parent company without jeopardizing its own finances.

In addition to GE Capital's profit, there is the potential to shift billions of dollars of reserves back to the parent company over the next few years as GE continues to scale back the finance arm, Sherin said.

In part, paying those reserves back to the parent company reflects GE's intention to pay back shareholders for the $12 billion in common shares it sold in October 2008 as it shored up its finances during the financial crisis, Sherin said. The company last year bought back the $3.3 billion preferred stake it had sold to Warren Buffett's Berkshire Hathaway Inc (BRKa.N) at that time.

"Our goal is to return the capital to shareholders that we ended up issuing in the financial crisis," Sherin said.

(Reporting By Scott Malone, editing by Tiffany Wu and Matthew Lewis)

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