General Electric Co's (GE.N) finance arm won regulatory approval on Wednesday to resume returning some of its profit to the parent company, a move that came earlier than some analysts had expected and could clear the way for GE to speed up stock buybacks and raise its shareholder dividend.
GE Capital plans to pay a $4.5 billion special dividend to the largest U.S. conglomerate later this year, which investors described as a sign that its regulator, the Federal Reserve, has confidence in the unit's financial position.
The finance arm emerged as GE's Achilles heel during the financial crisis, prompting Chief Executive Jeff Immelt to launch a drive to scale it back and re-focus the company on its industrial core.
"It's a strong vote of confidence that they've got the portfolio under control and are not worried about putting more reserves into it. In my mind, it takes a very big cloud off the GE story," said Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, Ohio, which holds GE shares. "It will allow a lot of income-equity investors to go back and re-evaluate the GE story."
GE shares rose 2.4 percent, or 44 cents, to $18.84 in early trading on the New York Stock Exchange.
"We thought the Fed would make them wait until 2013 depending on a lot of uncertain variables," Bernstein Research analyst Steven Winoker wrote in a note to clients. "The earlier and indeed larger nature of the dividend for 2012 is a positive surprise in our view."
GE shares have lagged the broader U.S. market for much of Immelt's decade-plus tenure. As of Tuesday's close they were down 7.5 percent over the past year, while the Dow Jones industrial average .DJI was little changed.
Immelt has told investors that raising GE's dividend and buying back shares are top priorities this year for the Fairfield, Connecticut-based company as it tries to repay shareholders for the $12 billion in common stock that it sold in October 2008 during the financial crisis.
But GE has not entirely stepped back from the acquisition trail. On Tuesday it said it would buy two makers of mining equipment, including Australia's Industrea Ltd IDL.AX.
DECEMBER DIVIDEND REVIEW
GE's board will consider its next move on the dividend in December, said spokeswoman Deirdre Latour. That marks a return to GE's historic practice of addressing the payout once a year.
GE officials had said repeatedly that resuming the payout from GE Capital to the parent company would depend on Fed approval. They declined to comment specifically on the Fed's findings on Wednesday.
"Like other communications with the bank regulators, our discussions with the Fed involve confidential supervisory information that we cannot disclose," Latour said.
GE historically received a dividend from its finance arm but halted that practice in the fourth quarter of 2008 amid liquidity concerns at GE Capital.
GE said on Wednesday the board of GE Capital had declared a quarterly dividend of $475 million -- representing 30 percent of the unit's first-quarter earnings -- payable to GE in the second quarter. The special dividend will be paid this year.
"With this announcement, GE Capital will return cash to GE beginning this quarter," Immelt said in a statement.
"This action demonstrates the strength of GE Capital and the significant actions taken to strengthen its liquidity, capital, asset quality and profitability."
The dividend payments are planned at 30 percent of GE Capital's total 2012 earnings, GE said. GE as a whole aims to pay about 45 percent of its profit back to shareholders as a dividend.
The company also said it plans to accelerate its common stock buyback program from the current quarter, depending on market conditions. GE had about $83.7 billion in cash and equivalents as of March 31.
The conglomerate last raised its quarterly dividend in December 2011 to 17 cents per share. It remains well below the quarterly rate of 31 cents in effect before it slashed the payout in 2009.
GE has been able to improve the finance arm's liquidity and capital levels since the credit crisis but pruned back its business due to uncertainties in the financial services market.
In April, Moody's downgraded the ratings of GE and GE Capital to reflect risks in GE Capital's funding model, and said risks still remained.
(Additional reporting by A. Ananthalakshmi in Bangalore; editing by John Wallace)