As recently as the last quarter of 2016, General Electric Company (NYSE: GE) stood poised for a comeback. Though the company had clearly struggled in previous years, the house (or lighthouse) Thomas Edison and J.P. Morgan built still boasted a monstrous market cap of $290 billion and a plan for the future.
Having sprawled into all things in all sectors — a true General Eclectic — the pivot called for creating a streamlined, energy-centric business. The stock held steady, if not spectacular, at $31 per share — up a third from the previous year. And that rock-solid dividend investors had come to expect? It had only been cut once since the Great Depression — and that was in 2009, during the Great Recession.
And then, someone shut out the lights — or rather, took a baseball bat to a string of bulbs.
In a mere 18 months, GE’s market cap has tapped out to $117 billion, down a stomach-dropping 60 percent. The stock trades at about $13 per share, shedding more than half its value. During that same time, the Standard & Poor’s 500 index has risen more than 10 percent.
[See: 7 of the Best Dividend Stocks to Buy for 2018.]
And as for the December GE dividend, investors couldn’t have dreaded a bigger lump of coal in their stockings. It wasn’t just trimmed but slashed in half: from 24 to 12 cents per share quarterly. And there it will stay when the next payout goes out to investors on April 25.
“The absolute last thing that a company wants to do is to cut its dividend,” says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “It is the strongest signal the company could possibly send that it is in financial trouble.”
The trouble Johnson speaks of is apparent in several ways.
In August 2016, GE stock took a hit after a rejected bid to buy the French wind turbine power group Adwen. One a year later, the company named a new CEO in John L. Flannery, who’d previously led the turnaround of GE Healthcare. Without doubt, Flannery has his work cut out for him. GE stock has been in free-fall mode for all of 2017 and 2018. Now what?
As Johnson puts it, an investor can read plenty into the dividend disaster without digging too deep into the numbers behind it.
“GE was a solid dividend payer: that is, a dividend king,” he says. “Investors who desired consistent cash flows were attracted to GE — but aren’t attracted to companies whose dividend policies are variable.” That makes it not only a negative signal to the market, but also “a negative from a planning standpoint for individual shareholders.”
There are some tangible ways to reverse course, though.
“Perhaps dividends will never be the same, however, if GE can lower its debt by a strong stock buyback program and creating brand identity, GE could begin to slowly increase its dividend again,” says Anne Drougas, chair of accounting, finance and entrepreneurship at Dominican University’s Brennan School of Business in suburban Chicago.
And if bragging rights mean anything — even as a consolation prize — then shareholders can’t even look to GE’s ongoing role as the mighty, history-making progenitor of the light bulb. Its lighting business is on the sales block.
“Shedding its lighting division is like driving through your old neighborhood and recognizing your childhood home was torn down and replaced by a strip mall,” Drougas says.
Since General Electric closed its last incandescent bulb factory in 2010, lighting has dwindled as part of its core business collective, making up just 2 percent of company revenue by that calamitous dividend announcement in November.
[See: 11 Steps to Make a Million With Your 401(k).]
True, there were boom times when LED bulbs hit critical mass 10 years ago. But the irony here it that the sales jump betrayed a lack of what some business titans discuss in whispers as planned obsolescence. As opposed to many other products such as laptops or smartphones, LEDs last for decades.
At the same time as the dividend cut, Flannery announced GE would concentrate on creating a “simpler and easier” company centered on health, power and aviation — but not lighting, the product that moved Edison to found the company in the first place.
Yet one of the remaining business units does claim some link to modern history, even if it’s lesser known. GE Power supplies more than 30 percent of the world’s power, according to the company’s latest investor update. Edison created the first-ever power station in 1882.
GE was also one of the founding companies of the Dow Jones industrial average in 1896, and the only original entrant still there. But such a distinction isn’t going to do much to quell investor jitters, let alone maintain that Wall Street status.
There is one hint of solace, as pale as it may seem: At 12 cents per share, GE’s fire sale dividend likely has nowhere to go but up.
“GE is currently selling at a forward price-to-earnings ratio of 12.7, which represents a substantial discount to the market,” Johnson adds.
But there’s no getting away from the fact that GE is losing money; hence the dividend cut, as GE is failing to generate sufficient cash flow.
Flannery moved to assuage investor and analyst concerns in January.
“The backbone of our recovery is stronger execution,” he says in a fourth-quarter 2017 earnings call. “Back in November, we laid out a new vision for the future, the foundation of which was improved execution, an obsession with cash generation and capital allocation, a more focused digital and additive strategy, and a rapid reshaping of the portfolio to become a simpler, more nimble organization.”
And yet there was the phrase “an obsession with cash generation” that pointed to what some experts contend is Flannery’s fatal flaw: a skill set that tilts more toward financial numbers than leadership and vision.
“Income investors are searching for comfort and GE used to represent a comfortable company under the leadership of Jack Welch,” Drougas says.
[See: 7 Dividend Stock Alternatives to Fuel Retirement Income.]
Welch, who served as General Electric CEO from 1981 to 2001, “understood how a company, like GE, needed to grow and was able to make swift decisions using financial data and laser-sharp instinct to move the company forward,” she says.
Maybe Flannery’s “obsession” is what GE stock needs at this point. But whether that’s any sort of orientation for the company’s future — one based on product innovation from the very start — remains to be seen.
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Dividend Cut Reflects Peril of General Electric Company (GE) Stock originally appeared on usnews.com
