General Electric Co., known now as GE Aerospace, has reclaimed its position as the largest industrial company by market value as jet engine production and after-market service both ramp up. This feat is nothing short of amazing given the mess that Chief Executive Officer Larry Culp inherited when he arrived in 2018.
Its market value of $219 billion doesn’t count the $121 billion value of GE Vernova Inc., the energy business that Culp spun out earlier this year, or an additional $40 billion from GE Healthcare Technologies Inc., which began trading separately in December 2022.
GE Aerospace’s fourth-quarter earnings outperformed expectations amid robust demand from commercial airlines that shows no sign of letting up, the company reported Thursday. The efficiency gains and repairs to the supply chain are also adding to profit. GE expects free cash flow to be as much as $6.8 billion this year, up from $6.1 billion in 2024. Shares of GE Aerospace jumped as much as 10%.
Investors love Culp because of his skills at creating value and his eagerness to share that with shareholders. GE Aerospace returned all its free cash flow to shareholders last year with about $5 billion of share repurchases and $1 billion of dividends. This year, the company plans to step up buybacks to $7 billion and raise the dividend by 30%. Still, investors should feel a bit shortchanged on the dividend at the expense of such large share repurchases.
Even with the 30% increase in the dividend payment, which puts it at about 37 cents a share, the dividend yield for GE Aerospace will be a paltry 0.6%. Before the company’s meltdown that began in 2017, GE’s dividend yield hovered around 5%, making it a leader among industrials.
Now, the company sits at the back of the pack, ranking 56th on dividend yield out of 72 industrial stocks on the S&P 500 Index, according to Bloomberg data. GE’s dividend yield is about a third of the average payout of 1.5% for industrials. There should be a better balance between dividends and buybacks.
GE’s quarterly dividend maxed out at $1.92 a share before it was cut in half at the end of 2017 and then slashed to just 8 cents in the fourth quarter of 2018. The quarterly payment was stuck there while Culp worked his magic to restore GE’s financial health. Last year, he bumped it up to 28 cents.
GE Aerospace has repaired its balance sheet and now has $19.3 billion of debt and $13.6 billion of cash and equivalents. Still, S&P Global Ratings has assigned GE Aerospace a BBB+ rating, which is three levels above junk but six levels below the stellar AA+ rating the company had in 2016. Perhaps more of its cash should be used to pursue a higher credit rating, which reduces borrowing costs. The company said on Thursday that it doesn’t plan to repay any debt and instead will refinance maturities coming due this year and beyond.
One problem for Culp is that ratings companies consider dividends a permanent outflow of cash, said Joel Levington, director of global credit research at Bloomberg Intelligence. That’s because investors expect dividends to rise over time, making companies reluctant to reduce them. The rating companies don’t weigh buybacks the same way because they are more flexible and not locked in like dividends.
The company should also consider building its cash position to take advantage of any large acquisition opportunities that crop up. GE has made a couple of small acquisitions, including an agreement to purchase Northstar Aerospace, a maker of gears and shafts. Analysts want GE Aerospace to be more aggressive. Robert Spingarn of Melius Research asked Culp whether he thought the company should add to its aerospace offerings beyond jet engines. Spingarn cited as an example RTX Corp., which bundles jet engines with other components, such as cockpit controls.
“We’re going to have a strong bias toward shareholder returns,” Culp replied. On acquisitions, “what we will do will be small tuck-ins and adjacencies.” So much for analysts’ dreams of Culp looking to merge with Honeywell International Inc.’s aerospace unit, which is about to be separated from the rest of the conglomerate.
Culp noted that GE has plenty of resources, especially as maintenance demand increases with airlines flying planes longer because of Boeing Co.’s delayed deliveries. Clearly, Culp’s choice for returning this cash to shareholders is through buybacks, which increase earnings per share (and thereby the stock price) by reducing the number of shares in circulation. The big advantage of buybacks is that they are tax-free for shareholders. Dividends are taxed, even if reinvested in GE shares.
Dividends are real money that go to shareholders, while the positive impact of buybacks can be erased quickly. Just ask investors of Boeing, which bought back $38 billion of shares in a five-year period ending in 2018. The planemaker, now struggling under a $58 billion debt burden, probably wishes now it had kept some of that cash.
Culp should keep this lesson in mind. Even if he prefers to return cash to shareholders instead of building up dry power, he should boost the dividend to have more balance between a direct payout and share buybacks.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Thomas Black
