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By Josh Peters, CFA | 04-29-2015 02:00 PM

GE: Setting the Stage for Higher Dividends

In winding down its financial-services business, GE is refocusing on what it does best, which should offer long-term dividend growth in the high single digits, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The market has generally cheered GE's move away from its finance businesses. I'm here with Josh Peters--he is the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy--to see what impact this move is going to have on the long-term health of the GE dividend.

Josh, thanks for joining me.

Josh Peters: Good to be here.

Glaser: So, could you walk us through some of the changes that GE has recently announced?

Peters: Well, the biggest change that you've had is a massive acceleration in their plan to wind down their financial-services business, GE Capital. You might remember that prior to the crash in 2008-09, GE Capital represented more than half of GE's earnings. So, you could add together all of the businesses that they had at that time from locomotives to power-generation equipment to NBC to the lightbulb business, and that was still less than GE as a bank.

Then, they went through the crisis period, which led to a dividend cut. I was on scene for that; I actually bought GE for the first time in April 2008. That wasn't great timing on my part; but I felt like the dividend would come back, and it has made some steps coming back. But what's been more encouraging, as I look out over what the stock is likely to do over the next five, 10, or 15 years--as opposed to the rotten five, 10, or 15 past years--is that it's going to be the infrastructure company that, at its core, it has always been best at being. And you're going to see that financial-services business shrink to less than 10% of earnings probably within the next couple of years.

Glaser: So, what do you think the prospects are for dividend increases from here, then? Is that infrastructure business strong enough to support big dividend hikes?

Peters: In the short term, you've got a lot of moving parts associated with winding down GE Capital. They are keeping some businesses; they are going to continue to finance aircraft and power projects and health-care equipment--what they call their three verticals. Those support the sales of their industrial products. So, that's not that much different from any other kind of vendor financing. They work together; two plus two should equal five--synergy, if you will. But the other businesses are being wound down much more quickly. And frankly, this is a good time to be a seller of things like middle-market-lending portfolios. They should find ready markets, as they already have for a big piece of their real estate business; but it's going to take some time. It's going to be expensive. They are not going to be able to shift all of the equity capital they eventually hope to take out of GE Capital immediately. It's going to take a couple of years. So, when they announced this, they said the dividend will be just flat at its current rate--$0.23 a share per quarter--through the end of 2016. That wasn't what I was hoping. I was actually a little bit disappointed that the dividend increase was smaller than I thought it would be at the end of last year. Now, this year, we won't get one at all. GE typically announces a dividend increase in late December, payable in the upcoming year.

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