GE Slips as Tight Industrial Margins Overshadow Profit, Dividend

General Electric Co. (GE) fell the most in a month as tighter margins in industrial divisions overshadowed a fourth straight quarter of profit growth combined with a dividend increase.

The company boosted its quarterly payout for the third time since July after earnings from continuing operations rose 58 percent to $3.58 billion, or 33 cents a share, excluding pension costs. That topped analysts’ 28-cent average estimate.

Chief Executive Officer Jeffrey Immelt plans to speed sales and profit growth this year and in 2012 by focusing on industrial units. He is spending on research and more than $12 billion of acquisitions since October, mostly in energy, as he builds technology offerings and the oil and gas division.

“Some investors may have ratcheted up expectations that GE was another ‘beat and raise’ candidate this quarter,” said Deane Dray, a Citigroup Inc. analyst in New York with a “buy” rating on the stock. “Longer-term investors should be encouraged about the incremental progress GE is making in its turnaround.”

GE fell 45 cents, or 2.2 percent, to $19.95 at 4:15 p.m. in New York Stock Exchange composite trading, the largest decline since May 16.

Before today, GE’s 12 percent gain this year had outpaced increases of 5.8 percent by the Standard & Poor’s 500 Index and 7.6 percent by the Dow Jones Industrial Average.

Total sales climbed to $38.4 billion in the quarter, topping the average projection of $34.3 billion.

Order Book

The Fairfield, Connecticut-based company’s total order backlog, a gauge of future profitability, was $177 billion, exceeding the fourth quarter’s $175 billion. Orders at large- equipment divisions including energy, aviation and health care rose 13 percent to $19 billion.

“The status of their order book was a major concern for us as the recovery limped along,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors Inc. in Cincinnati, whose parent company owns more than 2 million GE shares. “We feared they would run down the backlog and imperil future earnings, but this report quiets that fear.”

Sales, which rose 6.2 percent, were helped by more selling days as the quarter ended April 3 rather than March 28 a year earlier.

“It’s rare for a diversified industrial like GE to have every cylinder running smoothly,” said Joel Levington, managing director at Brookfield Investment Management Inc. in New York. “GE had enough positives, particularly energy and GE Capital, to get its engine driving forward.”

Dividend Increase

The dividend will rise 1 cent to 15 cents a share payable July 25 to shareholders of record at the close of business on June 20. GE cut its shareholder payout in February 2009 for the first time since the Depression to conserve about $9 billion as the global recession and credit crunch drained profit from the finance unit. The increases resumed in July.

Share buybacks and the dividend will “take priority as we get to the second half of the year,” Immelt said on a call with investors and analysts. “Our major transactions are done for 2011.”

Immelt said he’s satisfied with the company’s portfolio of businesses and plans no large divestitures.

GE will buy back the $3 billion in preferred shares sold to Warren Buffett’s Berkshire Hathaway Inc. during the financial crisis by the fourth quarter, adding back 3 cents a share annually, Immelt said.

Pension Costs

First-quarter revenue included proceeds from the sale of NBC, which generated 4 cents a share, tempered by 3 cents in restructuring, acquisition and disposition costs, GE said. About $3 billion in charges related to the sale helped push the consolidated tax rate to 53 percent in the quarter, GE said.

This is the first quarter GE has broken out pension costs or benefits in its income statement on a per-share basis. Including a pension cost of $163 million, net income attributable to common shareholders was $3.43 billion, or 31 cents a share.

Earnings in the energy unit, which includes the world’s biggest power-generation equipment maker and an oil and gas exploration division, fell 6.8 percent to $1.38 billion amid lower prices for wind turbines. Sales rose 9.2 percent to $9.45 billion, helped by acquisitions.

GE is “more bullish” on gas-turbine sales amid emerging- market growth including in the Middle East, Japan’s rebuilding of infrastructure after a March earthquake and tsunami and lower natural-gas prices, Chief Financial Officer Keith Sherin said on the call.

GE Capital

GE Energy said March 29 it agreed to buy most of France’s Converteam from Barclays Private Equity Ltd. and LBO France for $3.2 billion to add equipment that helps electricity flow to the power grid from devices such as wind turbines. That capped about $11 billion in energy purchases alone since October.

Profit at the aviation division, the world’s largest jet- engine maker, rose 5 percent to $841 million on sales of $4.37 billion, higher than some analysts’ estimates.

GE Healthcare, the world’s biggest maker of medical-imaging equipment and information technology systems, posted a 7 percent increase in profit to $531 million. The division’s sales rose 10 percent to $4.09 billion.

“We’re in really good shape for accelerating industrial earnings growth,” Immelt said. “All the precursors are in place: good equipment orders, good backlog growth, good service orders, international growing double digits.”

GE Capital’s net income more than tripled to $1.84 billion from $583 million as consumer finance rebounded and losses declined. Revenue rose 3.3 percent to about $12.3 billion. The unit’s results exceeded Sprague’s forecast by 5 cents.

Garanti Stake Sale

A $317 million gain from GE Capital’s sale of a stake in Turkiye Garanti Bankasi AS helped profit by about 3 cents a share, and having six more days in the quarter than a year earlier added about 1 cent a share, Scott Davis, a New York- based analyst with Morgan Stanley, wrote in a note to clients.

The “stock sell-off may be a bit overdone, but GE gave us little today to get excited about,” Davis, who has an “overweight” rating on the shares, wrote in a note to clients. “While sympathetic to frustrated holders and the bear view, reality is that GE remains one of the only ‘value’ names left in industrial-land.”

Even excluding Garanti, “we feel like we have a very good quarter,” Sherin said in an interview.

Cash generated from industrial operating activities was $1.7 billion in the quarter, as the company works toward a goal of $12 billion to $13 billion a year excluding NBC. GE had $82 billion in consolidated cash at the end of the quarter.

Industrial Sales

The narrower margins pushed profit in GE’s industrial units below estimates from analysts including Jeffrey Sprague of Vertical Research Partners and Nigel Coe of Deutsche Bank AG, who both rate the stock “hold.”

“At the industrial operating level, results missed our forecast by a penny, despite additional days” in the quarter from the year-ago period, said Sprague, who’s based in Stamford, Connecticut. He cited weaker than expected margins in energy, oil and gas and health care.

Industrial product sales declined 6 percent from a year earlier because the figure includes about 1 month of NBC revenue in 2011. Excluding NBC from both periods, revenue rose 8 percent.

GE’s consolidated tax rate was 37 percentage points higher than a year earlier, reflecting the company’s projection that the rate would rise significantly after the NBC sale.

The company’s taxes have been in the public spotlight since the New York Times reported March 24 that GE had a tax bill of zero in 2010, an assertion the company called misleading on its GE Reports website. The criticism prompted a hoax press release last week.

GE has rebuffed the tax bill claim specifically and said the company received no rebate, refund or payment from the government on its 2010 taxes.

Excluding the NBC-related charges and gains, GE’s quarterly tax rate was about 22 percent, and the GE Capital unit’s rate was about 18 percent.

To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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