General Electric (GE) announced a 4% dividend increase on Friday, increasing its quarterly payout by a penny from 23 cents per share to 24 cents.

While General Electric’s dividend increase was perhaps smaller than some long-term shareholders desired, it was still meaningful because it marked the company’s first payout raise since late 2014.

However, GE’s dividend payout remains 23% below its peak of 31 cents per share, which ended in early 2009 when the company slashed the quarterly dividend to 10 cents.

General Electric is one of those companies that elicits strong feelings (to put it nicely) from many investors.

The company has a history of overpromising and under delivering, GE’s share price remains lower than it was a decade ago, and the painful dividend cut in 2009 will not be forgotten anytime soon.

Despite these grievances, General Electric’s future prospects could be better than investors have come to expect.

With many investors still focused on General Electric’s “lost decade” and unwilling to trust CEO Jeff Immelt and the company’s portfolio transformation that is well underway, I continue to believe an appealing investment case is building for long-term dividend investors.

In fact, we have held shares of GE in our Top 20 Dividend Stocks portfolio since mid-2015. In my view, GE’s dividend increase marks yet another step in the company’s overhaul.

General Electric’s Transformation

GE’s near-destruction in 2009 was the result of its highly leveraged banking operations (GE Capital), which had extended too far into risky areas for the sake of growth.

While the company avoided bankruptcy, thanks in part to Warren Buffett’s investment (see Buffett’s top high-yielding dividend stocks here), it was shaken to its core.

Fast-forwarding to early 2015, GE began an industrial transformation plan to reduce the risk of its operations and refocus on its strengths.

The plan calls for divestment of non-core financial services assets to increase the contribution of industrial earnings from 59% of total income between 2000 and 2015 to 90% of total income by 2018.

As seen below, GE Capital accounted for a relatively small portion of sales (9%) and profits (9%) in 2015.

Segment % of Sales % of Profit
Aviation 21% 28%
Power 18% 23%
Healthcare 15% 15%
Oil & Gas 14% 12%
Capital 9% 9%
Appliances & Lighting 7% 4%
Energy Management 6% 2%
Renewable Energy 5% 2%
Transportation 5% 7%

GE’s remaining operations are easier to analyze (for a conglomerate, at least) and could result in a higher earnings multiple for the company’s stock, too.

During the company’s third quarter earnings call, GE noted it has “virtually completed” its pivot in financial services with $193 billion of asset disposal signings, nearly hitting its goal to dispose of $200 billion of assets within 18 months.

General Electric’s industrial business is the core profit driver now, and many investors could be underappreciating its value because of GE’s historically complex and rather opaque web of other businesses.

The company’s industrial services business accounted for 44% of the industrial segment’s revenue in 2015 and more than 75% of its operating profit.

GE’s equipment is very costly but essential for customers’ operations. The company’s service contracts ensure customers’ equipment remains up and running.

In other words, unlike equipment orders, service revenue is much stickier and less susceptible to economic cycles. In fact, GE’s industrial earnings dropped by just 13% and 7% in 2008 and 2009, respectively.

General Electric’s massive scale and distribution make it hard for rivals to compete. With over $100 billion in annual industrial sales, GE enjoys lower production costs on its equipment, which it can sell at extremely low prices (or even at a loss) compared to its competitors.

Accepting weak margins on equipment is worth it because it locks in years of high-margin, recurring aftermarket service business needed to keep customers’ equipment running.

With operations dating back to 1892, GE is also a preferred vendor because of the massive amounts of equipment performance data it has collected to strengthen its customer relationships and brand.

As General Electric continues investing in software analytics to improve the performance of its equipment out in the field with applications like predictive maintenance, its services business should become stickier with potential for even higher margins.

For example, GE noted during the third quarter that services margins expanded 220 basis points, driven by the increased use of analytical tools. Revenue from analytical applications and software continued its double-digit growth, rising 13% during the third quarter.

General Electric is never going to be a fast-growing company, but its high mix of industrial services revenue should result in much more predictable earnings going forward. This is a good thing for investors and for the safety of the company’s dividend.

Dividend Safety Analysis: General Electric

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.

Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.

Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.

General Electric

We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.

General Electric has a Dividend Safety Score of 52, indicating that the company’s dividend is reasonably secure.

Importantly, GE Capital is no longer a risk to the company following the divestments the company has made. As I discussed above, the remaining industrial businesses were resilient during the last downturn because of their high mix of recurring services revenue.

The company’s earnings payout ratio will likely come in at 62% this year, which is a little on the high side but will decline as earnings growth outpaces dividend growth the next two years.

Considering the relatively resilient performance of the industrial business in 2008-09, GE’s payout ratio isn’t a big concern to me today.

In fact, the company’s industrial businesses generated $17 billion of cash flow during the financial crisis, which compares favorably to the $9.3 billion in dividends GE paid out last year.

Turning to the balance sheet, GE maintains an “AA-” credit rating from S&P and has some capacity to increase its financial leverage, which it plans to take advantage of.

While I am not a fan of high debt loads or debt-fueled acquisitions for the pursuit of growth, it’s unlikely that GE’s balance sheet would put its dividend at risk.

The company’s business diversification also helps the dividend’s safety. When one end market is weak, another is likely strong. For example, despite the slump in oil & gas, GE’s organic sales grew 1% during the third quarter.

If oil & gas is excluded, sales increased 6% and are up 4% year-to-date. Organic sales in the fourth quarter are expected to be up 4% as well, signaling stability.

General Electric’s Dividend Growth Prospects

Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?”

It considers many of

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