The moment of reckoning many analysts expected at
The engineering conglomerate, which makes everything from jet and train engines to energy grid infrastructure and mammogram machines, will be slashing its dividend 50% as incoming CEO John Flannery works to right the company's course amid woeful performance.
GE will now pay a 12-cent quarterly dividend, down from its prior 24-cent-a-quarter payout, due to the company's weaker than expected cash flows in its power business, pension costs and hefty insurance claims that have hampered dividends from its financial operations. Flannery's dividend cut marks the second big surprise since he took the reins of the $177 billion market capitalization company this summer, replacing Jeff Immelt. Weeks into Flannery's tenure, he slashed GE's earnings outlook. Shares of GE have been falling since, hitting new post-crisis lows of $19 in Monday trading.
GE's dividend is prized among its shareholders, particularly retail investors and retirees who've owned the stock for decades. Former CEO Immelt characterized his decision to cut the company's dividend during the dark days of the crisis - when GE was teetering on collapse - as the worst moment of his career. It appears to be an equally brutal event for Flannery.
About the move, Flannery said the following to investors: "We understand the importance of this decision to our shareowners and we have not made it lightly. We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation."
His statement marks a radical change of course after Immelt had tried to make GE's story one of increased returns of capital in recent years. Perhaps things have gotten so bad for GE and confidence in management's promises was so poor investors all-but-expected the painful move.
GE shares rose more than 1% in pre-market trading to $20.77 on the dividend bomb, but then renewed their plunge at the open, falling over 5% by early afternoon. It's more misery for investors, who've seen their holding plunge plunge 40% year-to-date, missing out on a 16% surge in the S&P 500 and even better performance from "old economy" stocks like Deere,
The upside now seems to be that the worst is over for GE.
Since becoming GE's leader, Flannery has projected a style of accountability where he will be reviewing all businesses and making tough decisions when change is deemed necessary. The company's unrealistic earning guidance and its outstretched dividend are now gone; soon Flannery may wield a scalpel to underperforming divisions, or those that fit better in the portfolio of a private equity buyer.
On a conference call with investors on Monday, Flannery vowed he and 1,000 executives will stop receiving long-term bonuses. But fanned more worry by offering 2018 earnings guidance of just $1-to-$1.07 a share and organic revenue growth of zero to 3%. Margins are only expected to improve as much as 40 basis points in 2018.
In terms of divisions, power looks to continue to be a black hole; organic revenues may decline double digits and operating profits may fall by a quarter. Transportation, another laggard, may fall by similar measures. Net income at GE Capital could fall 80%.
It is likely Flannery will try to refocus in areas where the company has a market leading footprint, for instance aviation, healthcare and renewable energy equipment. Aviation and healthcare are likely to be GE's fastest growing businesses best businesses such as renewable energy and aviation could grow their top and bottom likes by double digits and healthcare in the mid single digits. Before becoming CEO, Flannery turned around GE's once-ailing healthcare business.
The company still believes it could shed some $20 billion in assets. Furthermore, as he was one his way out, Immelt set the stage for a slimming down of GE by merging its oil equipment business with
Activist hedge fund Trian Partners may play a role as GE cleans house. Amid its 2017 tailspin, GE invited Trian's Nelson Peltz to join its board of directors and now the company will trim its board from 18 to 12 directors, including three new members. The smaller, reshaped board may create a new mindset. Peltz has agitated for a restructuring of old line conglomerates like
With an arduous restructuring looming at GE, despite the $575 billion in deals its former CEO inked that exited businesses such as finance and media, one thing is clear: GE's days as a safe and steady dividend grower are done, its new yield is barely above the S&P 500. The company, once a blue chip stock, is now a turnaround play.
Read more: Forbes' analysis on Jeff Immelt's $575 billion in deals and stagnant stock
