Optimism that GE Capital will resume paying a dividend to parent company General Electric is pushing the stock higher on Wednesday.
GE's stock (NYSE: GE) has suffered in recent years in part because of concern over the company's financial unit which suffered losses in the 2008 recession, prompting GE chairman and CEO Jeff Immelt to apologize for the division's risk-taking ways. Over-extended in real estate during the bubble among other risky plays, GE Capital's woes caused widespread concern among investors, and have kept the company's stock consistently below $20 per share.
But GE was trading up $1.29 percent on Wednesday to $19.84 on a report from Credit Suisse analysts Julian Mitchell, Charles Clarke and Jonathan Shaffer which estimates that GE Capital will soon resume paying a dividend to its parent company, resulting in higher shareholder returns.
After facing declining revenue since the 2008 recession GE Capital is experiencing increased profit margins (17.1 percent) leading to hope that the division will pass along billions to GE in the next two years.
We estimate that GE Capital will earn $7.5 billion in 2012 and $8.6 billion in 2013; historically GE Capital paid well over 50% of earnings to the parent, the analysts wrote in a research note. This implies an annual distribution run-rate of $5 billion+ potentially, most of which could be returned to shareholders; a $5 billion dividend hike would push the yield to 6%, although given the payout ratio is already 44%, much of this may be returned through a buyback.
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Historically GE Capital dividends to the parent have been as high as 90% of Capital earnings. Assuming a simple mathematical average of the last four years (the last up cycle), would suggest a dividend of potentially $10 billion over the next two years.
GE's stock responded, pushing near the psychological $20 mark and near its 52-week high of $20.85 on Monday. Currently GE's stock pays a dividend yielding 3.6 percent.