Are GE’s Free Cash Flows Sufficient for Dividend Growth?
General Electric’s 2016 free cash flows are expected to remain at $8.2 billion. This is mainly due to free cash flows of -$6.0 billion generated in 1H16.
Sept. 14 2016, Updated 10:05 a.m. ET
General Electric’s dividend payout
As we discussed in Part 1, General Electric’s (GE) dividends haven’t grown in the last six quarters. Its dividend CAGR (compound annual growth rate) in the last seven years ending in 2015 is 7.1%. This single-digit growth isn’t that impressive. The 2Q16 dividend of $0.23 per share translated into a dividend payout ratio of 76%. The dividend payout ratio is the percentage of General Electric’s net income paid out as a dividend. Historically, its dividend payout has been around 50%.
General Electric’s free cash flows
The free cash flow is calculated by deducting the capital expenditure from General Electric’s operating cash flows. Normally, the company uses the leftover cash to pay dividends, buy back shares, or reinvest in its business. Over the last four quarters, General Electric’s free cash flow has gone down to -$2.5 million from $23.2 million in the previous four quarters. During the same period, the company’s capex rose slightly from $6.7 billion to $7.1 billion.
Over the next two quarters, analysts expect General Electric’s free cash flow to rise to $14.2 billion. The company’s overall 2016 free cash flows are expected to remain at $8.2 billion. This is mainly due to free cash flows of -$6.0 billion generated in 1H16. It’s evident that the current free cash flow levels don’t support the dividend payments.
Is it enough for General Electric’s dividend payments?
A detailed study of the company’s operating cash flows in the recent quarter reveals that the operating cash flows have gone down considerably in the last four quarters. This is a disappointment for dividend investors in the short term. General Electric’s reorganization and closure of businesses in recent years impacted its operating cash flows. The short-term dividend growth outlook remains bleak.
ETF investment
There are nearly 94 ETFs that have General Electric in their portfolio. Investors who want to indirectly hold General Electric can opt for the iShares Global Industrials ETF (EXI). General Electric makes up 7.8% of EXI’s portfolio holding. The other major industrial names included in EXI are 3M Company (MMM), Honeywell International (HON), United Technologies (UTX), Union Pacific (UNP), and United Parcel Service (UPS).
In the next part, we’ll compare General Electric’s forward dividend yield with its close peers.