With the dust finally settling on the news that General Electric Company (NYSE:GE) has a new CEO—John Flannery officially replaced Jeff Immelt on August 1st—owners of GE stock can once again focus their attention on the matters that concern them the most. That is, how well the company is (or isn’t) doing. While Flannery certainly has different ideas than Immelt did, he inherited the same company and the same problems.
Chief among shareholder concerns right now is, how protected is the dividend GE has so famously, reliably paid for decades? There was chatter about it being cut prior to Immelt’s exit and though Flannery is serious about cutting expenses, there’s no assurance that’ll be enough.
Here’s a chart and one simple “food for thought” reality that all current and would-be owners of GE stock need to process sooner than later.
General Electric, in One Easy Picture
How does the old saying go? A picture is worth a thousand words?
If that’s the case (and in the world of investing, it is indeed the case), the image below may tell you all you really need to know about the future of GE’s dividend. In short, though it once had a wide cushion between what it was earning and what it was giving back to General Electric stock holders, GE has been cutting it uncomfortably close in terms of its dividend over the course of the past year and a half. And, at its current trajectory, it may well have to lower its payout.
It could carry on as is, mind you, without making any changes. Though it’s paid out more than it’s taken in a couple of times since early 2016, on a rolling twelve-month basis, GE has some fiscal wiggle room. That wiggle room continues to narrow though; and besides, a company doesn’t want to not put something in the coffers to invest in its own growth. Should the company not decide to keep more of what it’s making, it may start to struggle more than it already is.
That said, notice that per-share cash flow has actually been less than the company’s dividend for the better part of the past couple of years. That’s been a particular pain point for General Electric and its shareholders.
The future certainly looks brighter. Revenue is projected to start growing again, as are earnings. Assuming analysts are right, the payout won’t be a problem anymore going forward.
That’s a terribly bold assumption though, in light of the fact that Flannery has yet to convince anyone they’ve got good reason to expect that kind of revenue growth. Indeed, GE recently dialed back its 2020 revenue outlook for its flagship GE Digital arm, from $15 billion to $12 billion, as demand hasn’t been as strong as suspected.
And, just a few days ago, the company announced it was selling its industrial solutions business to ABB Ltd (ADR) (NYSE:ABB). Though this unit was one of the company’s less productive ones in terms of profits, and the sale of the business will put $2.6 billion worth of cash into General Electric’s pocket, it’s still shedding a business that added to the top and bottom line.
In the meantime Flannery is aiming to cull $2 billion worth of annual costs by the end of next year. That will superficially help, to be sure. This is a company that incurs annual operational expenses of more than $22 billion on a regular basis though. Between the sale of its industrial business and the adverse, unforeseeable fiscal impact of cutting out $2 billion in spending, that plan may not make a meaningful dent in the bottom line.
Reality Check for Owners GE Stock
Kudos to John Flannery for doing something. Too many CEOs would have continued “business as usual,” hoping something would change, but without creating the change that was ultimately needed. It takes boldness to sell what used to be a key division, and it takes almost as much boldness to cut spending that was clearly was deemed necessary.
As it stands right now, however, General Electric may be falling into the same trap retailer Sears Holdings Corp (NASDAQ:SHLD) has. That is, Sears has been selling the best, most productive pieces of itself (Land’s End, J Crew, and flagship stores) to pay its bills, but in so doing, it crimped its ability to drive revenue that becomes positive cash flow.
Chief among Sears CEO Eddie Lampert’s cardinal sins, though, was a failure to fix what was ultimately broken: giving consumers a good reason to buy from its stores.
Sears and GE are still like night and day, to be fair. Lampert thinks he’s doing the right thing, and Flannery has to know that at some point he’ll have to start growing the business lines he’s still got rather than selling the ones he feels the company can afford to shed. Right now though, real organic growth seems like it’s the one thing most out of reach for General Electric.
If GE doesn’t turn things around in a meaningful way for its existing divisions, and soon, the dividend truly is in trouble.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.