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GE's Dividend Is on Solid Footing

Despite rising payout ratios, we believe a growing backlog and the appointment of a new CEO protect the foundation of GE's dividend.

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Barbara Noverini: The sustainability of GE's dividend has been a controversial issue with investors lately, as first-quarter earnings revealed a hefty use of cash by GE's industrial businesses despite strong year-over-year organic revenue growth of 7% and 130 basis points of industrial operating margin expansion. There is no question that investors are hard-pressed to forget that GE cut its dividend in 2009; however, we believe that the confluence of events leading to this outcome is unlikely to repeat.

As is always the case with GE, there are a lot of moving parts to this debate, so let's take a moment to break it down. First, quarter-to-quarter cash flows in GE’s industrial businesses can be very lumpy, and industrial free cash flow is often back-half loaded. We expect that GE can deliver 3% of organic revenue growth for the year, along with about 100 basis points of industrial operating margin expansion. This, combined with an additional $1 billion of structural cost outs and better working capital management gives us line of sight to industrial free cash flow in 2017 just over $9 billion, enough to cover approximately $8 billion of common stock dividends without help from GE Capital.

Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.