GE's announcement of a 10% hike in its dividend this week is very good news. GE has long been a bellwether of the US economy, and the double digit increase is a plus not only for GE, but also for the entire US economy and stock markets. CEO Jeffrey Immelt also announced future earnings growth in the range of 10-15%. We believe this guidance says three things:
1. Earnings will grow faster than 10%
2. Dividends should also grow at least at 10%
3. Average US profit growth should be also close to 10% over the next few years.
More importantly, GE's dividend and earnings growth pronouncements allow us to compute its intrinsic value. Starting with a dividend of 86 cents, growing at 10% per annum over the next five years then gradually slowing it to a long-term growth rate of 6.0%, all discounted at 9%, produces an intrinsic value of just under $42.00. We think its just a matter of time before the stock trades there. It is currently trading at $37.26 This is the best news on dividends I have seen in a long time. GE is so big and so important to our economy that their guidance sheds a light on the whole economy. Well done Mr. Immelt.
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