New General Electric Company (NYSE:GE) CEO John Flannery took over a difficult position. Prior CEO Jeff Immelt left the ship (and GE stock) taking on plenty of water. But the new chief exec has already been making swift decisions about the new direction of GE. Will it be enough?
Immelt bought into energy and bailed on financials at the wrong time. He made error after error that were profoundly close to being lethal. Instead his series of “near-miss” mistakes led to a very melancholy stock price over the past decade. GE stock is down 40% in ten years and up a pathetic 10.5% over the past 20.
Its 10-year losses are reduced to -13% and its 20-year gains are boosted to 98% when considering the dividend. That still lags the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gain of 103% and 278%, respectively. But it highlights the importance of GE’s dividend.
Despite his numerous blunders, Immelt’s worse one centers around cash flow. The company’s operating cash flow (OCF) has all but dried up after years of near-$20 billion totals. Free-cash flow (FCF) is all but gone, leaving many investors worried about the company’s dividend that has been the only saving grace over the last two decades.
Where To Now for General Electric?
Flannery has been decisive, something investors should be happy to see. Indecision, and then the wrong decision, plagued the old GE regime. Flannery recently grounded the company’s fleet of private jets. The CEO is sticking to his original goal of cutting $2 billion in costs by the end of 2018.
The company also just sold its industrial solutions business for $2.6 billion to ABB Ltd. The unit generates $2.7 billion in revenue, but has become bloated with costs. ABB says it will be able to cut costs on the unit by about $200 million annually by the fifth year. GE simply wanted to rid its hands of the unit and look to cut back its operating expenses and boost its overall margins.
This shows that Flannery isn’t scared to make quick, rip-the-BandAid-off moves. This though, can also be scary, (more on that in a minute).
How to Boost Margins
“I have a lot of decisions to make in my new role as CEO, but one decision is easy: GE is all in on digital,” Flannery wrote in an essay on LinkedIn (now a part of Microsoft Corporation (NASDAQ:MSFT). He’s made it clear that while other businesses may be on the chopping block, this one is not.
We recently touched on the fact that GE slashed its long-term revenue guidance for GE Digital. The success of GE Digital is quite important for the next five to ten years. Why? Because without it, I doubt we get the margin and revenue growth management is expecting.
Despite its struggles, GE has an enormous customer base of industrial companies. Its GE Digital segment improves the efficiencies of these companies. Thus, General Electric already has a large pipeline of potential sales. Flannery was able to turn healthcare into one of GE’s lone bright spots. If he can do the same with GE Digital, it will launch General Electric into the digital age. It could propel General Electric to higher growth, better margins and ultimately, a higher valuation for GE stock.
The Bottom Line for GE Stock
A booming GE Digital business is a ways off, but near-term issues still exist. Circling back to pulling off the BandAid, this can be scary in one respect: The dividend. The company is aiming to cut $2 billion in costs this year.
That’s a lot, but it’s only about one-fourth of what it pays out annually in the form of a dividend. Now yielding 3.8%, the dividend is what many investors relied upon. It’s what investors have clung to in these desperate times. For many income investors, it may be the only reason, or at least the main reason, they own GE stock.
To cut, suspend or do anything other than maintain the dividend will be a blow to shareholders. Will Flannery do just that? On November 13th, Flannery & Co. will provide an investor update. We should know then what’s going on with the dividend. On the most recent earnings conference call, then-CEO Jeff Immelt said the dividend was one of the company’s top priorities.
But with cash flow issues and a payout ratio that’s already ballooned to more than 100%, investors have a right to be nervous. Flannery is proving he’s not afraid to cut costs and push forward. This would be a big move that I’m sure some in the C-suite would caution against. He’ll weigh it carefully.
But if management wants a full reset and to lower the bar completely, a dividend cut can’t be off the table.