The Best Stock To Buy Right Now For Dividends
Santa Claus just showed up early for dividend stock investors.
Big changes at GE $GE mean the dividend investing landscape has changed in a big way.
What’s up?
I’ve been disgusted with GE for years. And I’m hardly alone.
When GE was trapped in the wreckage of a financial house of cards that tumbled down in 2008, shareholders paid the price.
A company founded by Thomas Edison with a history of paying dividends every quarter since 1899 cut the dividend in 2009.
The General Electric dividend was slashed by 68%. It shrank from 31 cents to 10 cents, so the company could get back $9 billion a year from shareholders to cover its bills.
Because of all the fancy financial shenanigans it wove through the murky banking and lending units at GE Capital, General Electric couldn’t plow through the downturn of 2008.
For the past seven years, it’s been trying to figure out what to do.
Now, GE is making big changes.
It’s getting out of the finance business, and focusing on its core, industrial business.
CEO Jeffrey Immelt calls these changes a “historic pivot”.
Reason #1 Why GE Is The Best Stock To Buy Now For Dividends
GE is finally shoving a very expensive elephant out of the room.
It’s unloading most assets of GE Capital and picking up $26.5 billion.
Buyers include outfits like Blackstone $BX and Wells Fargo $WFC.
It has letters of intent from other firms ready to pony up another $4 billion.
What’s the big deal about dumping these business units?
Finance is a lousy business to be in. It’s getting tougher and tougher to make money.
GE CEO Jeffrey Immelt admits it…
“The business model for large, wholesale-funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward.”
This one strategic move makes GE one of today’s top stocks to buy.
Actually, the top stock to buy.
Reason #2 Why GE Is The Best Stock To Buy Now For Dividends
GE won’t behave like a drunken sailor in port with its newfound bundle of cash.
The dividend won’t go up right away. It will stay the same, 23c a quarter, 92c a year, for the next year or so.
The reason why: money from the sale of the real estate and financial assets doesn’t start rolling in right away. GE starts to collect the big payments in 2016.
That’s when the party gets rolling.
GE will reward investors with $90 billion by 2018 through share buybacks and dividends.
The key question is how much of this windfall goes to pay dividends.
Based on what we’ve been told, roughly $50 million. Share buybacks are fine, but when you’re a dividend growth investor, payments are better.
We can measure the value of a dividend. It’s income… cash on the barrelhead.
The share buyback is probably a good thing, but tougher to measure.
When the number of outstanding shares goes down, the relative ownership stake of each shareholder goes up. Fewer shares mean dividends are paid to fewer people, which theoretically increases the dividend.
But that’s theory. It doesn’t always work out that way.
But in the context of the ugliness GE has been slogging through, $90 billion in dividends and share buybacks by 2018 is a beautiful thing.
Reason #3 Why GE Is The Best Stock To Buy Now For Dividends
GE is turning itself into a better company.
It will focus on an important collection of business units that can deliver solid revenue and good profit margins.
Businesses like aviation, energy management, healthcare, industrial solutions, and power distribution.
GE builds railroad locomotives, thermal power storage systems, monitoring and diagnostic services for the energy industry, and commercial lighting systems.
It’s strange to think about GE without NBC, which it spun off in two different deals over the past few years.
And it’s strange to think about the company without most of GE Capital, which has been around forever.
But the new slimmed down GE looks terrific. This renewed focus lets GE play to its strengths in the so-called “Infrastructure Industries”.
The firm has a good foothold in growth markets around the world, and should do well if it sticks to its knitting.
Reason #4 Why GE Is The Best Stock To Buy Now For Dividends
Focus wins.
GE is hammering the last few nails into the coffin of a conglomerate.
History tells us this is a smart move. Big companies that are cobbled together by buying other companies in different businesses don’t usually have happy endings.
We saw this in the 1960s and 1970s with conglomerates like ITT Corporation, Litton Industries, Textron, Teledyne, Gulf+Western, and Transamerica.
Their wheels came off.
The only meaningful exception to the rule of the unruly conglomerate is Warren Buffet’s Berkshire Hathaway $BRK-A.
And the leadership of Jeffrey Immelt at GE has revealed that he’s no Warren Buffet.
Anything About GE You Should Worry About?
Sure.
You don’t want to ignore the fact that over the past 10 years, GE stock is down 20% while the Dow is up 73%.
On one hand, you’re avoiding the problem of buying a stock that’s expensive, and perhaps peaking. You don’t have to worry about buying at the top.
On the other hand, GE has something to prove.
Just because it’s unloading a problem doesn’t mean everything automatically falls into place with its industrial operations.
GE needs to make sure its focus on the core industrial business is aimed in the right direction.
In 2014, these industrial operations pitched in 58% of GE’s earnings.
GE says this needs to go up to 90% in the next two years.
And getting out of the finance business won’t be cheap. It comes with a price tag pegged at $23 billion, along with a tax bill of $6 billion.
If these numbers are low, the amount of money available to pay the dividend could be driven down.
And GE’s tax bills will go up. A bunch of tax breaks the financial businesses have been able to provide go away.
Don’t be surprised if GE’s tax rate doubles.
But by and large, GE is making a smart move.
And smart dividend investors can pick it up at a nice price.
You’ll see that the stock has backed off the recent high it hit the day it unveiled its changes…
It’s nice to see GE back in the spotlight.
I figure it will be America’s #1 dividend stock for a while.
It’s a perfect companion to my The Best High Dividend Stocks For 2015.
And if you’re one of those long suffering GE investors who held on after the fall from glory in 2009, looks like you’re finally in for some well-earned redemption.
Regards,
Michael Jennings
Dividend Stocks Research
Note: Michael Jennings writes and edits DividendStocksResearch.com. Sign up for our free dividend reports and dividend newsletter at http://www.dividendstocksresearch.com/free-sign-up. We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.
Category: Dividend Stocks
