Baker Hughes and General Electric completed their merger on July 3, 2017. Baker Hughes shareholders received $17.50 in cash and one share of new Baker Hughes stock (BHGE).
BHGE has yet to declare a dividend. Old Baker Hughes (BHI) paid a quarterly dividend of $0.17 per share. Although GE owns 62.5% of BHGE, it does not currently have any economic rights to BHGE’s earning or dividends. In the proxy statement for the merger, the company was noncommittal about its future dividend policy, saying that this would be a matter taken up at a future meeting of its Board of Directors.
A quick look at the combined companies suggests that BHGE should be able to continue paying a dividend going forward. BHGE will incur integration costs and $900 million of restructuring costs to reap $1.2 billion of estimated synergies. Much of these costs will be front-loaded (i.e. taken during the balance of 2017 and 2018). That is the primary driver of consensus expectations of breakeven results in 2017.
For 2018, the consensus estimate of $1.80 in earnings suggests that BHGE should have the capacity to support a dividend that is at least equal to the previous annual BHI dividend of $0.72. Given the $7.4 billion payout from the merger (all of which was funded by GE), a case can be made for reducing the dividend by as much as one-third; but it is still quite possible that BHGE could simply reinstate the dividend (as long as the oil & gas industry does not suffer another major setback). While it is possible that BHGE may wait to initiate a dividend until certain integration milestones have been achieved, it would be surprising, indeed, if the Board decided to forego a dividend payment entirely.
At the reinstated rate, the dividend would give BHGE shares a 1.8% dividend yield, which is less than GE’s dividend yield of 3.6%, but better than all of BHGE’s major peers, except for Schlumberger’s (SLB) 3.1%.
July 12, 2017
Stephen P. Percoco
Lark Research, Inc.
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