Two Outstanding Dividend Stocks: General Electric Company (GE), Siemens AG (SI)

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Siemens dividend looks a bit choppy – this is mainly due to the conversion from EUR to USD. In EUR the dividend was never reduced over the last decade, while in USD conversion rates caused occasional drops. For comparison in EUR the dividend grew from 1.10 EUR to 3 EUR from 2003-2012, an annualized rate of 11.79%. In USD this growth rate was a bit higher at 12.58%.

Is It Sustainable?

Before drawing any conclusions lets look at the payout ratio for both GE and Siemens. This is the percentage of the free cash flow paid out as dividends each year. In the TTM period GE paid out 47.6% of FCF in dividends. In 2011 this ratio was only 31.3%, the increase being a result of a decrease in FCF. Even so, 47.6% is fairly low. Siemens paid out 57.53% of FCF in dividends in the TTM period.

GE has more room to expand its dividend via payout ratio expansion. Siemens future dividend growth will most likely follow their earnings growth. One thing to note is that the 3 EUR dividend payment was held constant for the past two years. This would suggest that Siemens future dividend growth will be slower than in the past. GE, on the other hand, should be able to growth the dividend much faster than Siemens, at least for a while anyways. The question is: Does Siemens superior yield make up for this?

How Fast Does It Need To Grow?

I’ll use a dividend discount model calculation to determine at what rate each company must grow its dividend in order to justify its current share price. I’ll use a two-stage model where the next 10 years sees elevated growth and then growth subsides to a 3% perpetual rate. For a discount rate I’ll use 8%, roughly the long term growth rate of the market as a whole. The calculations are shown below.

General Electric

Siemens

GE needs to grow its dividend at 8.625% annually for the stock to be fairly valued. Given the low payout ratio and high growth over the past couple of years GE will most likely surpass this. Siemens, because of its higher yield, only needs to grow its dividend at a rate of 5.768%. This is far lower than the historical rate, although the recent stagnant dividend (in EUR) is a cause for concern. Another cause for concern is that the dividend is tied to the conversion rate between Euros and Dollars. This seems like a fairly large area of uncertainty and could have a negative effect on the dividend.

The Bottom Line

Both GE and Siemens look undervalued here in terms of dividends. I tend to favor GE more because of the prospect of higher dividend growth in the next few years and the currency issue surrounding Siemens. Of course, Siemens wasn’t forced to cut its dividend during the financial crisis, which is a sign that the company may understand risk a bit better than GE. Both stocks look like good candidates for a dividend investor, though.

The article Two Outstanding Dividend Stocks originally appeared on Fool.com and is written by Timothy Green.

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