General Electric Company (NYSE:GE) shareholders have sat by this year, rather sullenly, and watched the markets rally. The S&P 500 is up now almost 15% and the Dow Jones Industrial just a hair over 18%. Meanwhile, GE stock has fallen 40%.
On Monday, GE fell another 7% after announcing that it would focus on its aviation, power and healthcare units, cutting its dividend and profit outlook in the process.
While this move may have pained CEO, John Flannery, to announce, there’s no doubt it pained investors more. GE’s third-quarter earnings did little to placate investor concerns, and neither did today’s investor meeting.
Now at its lowest level since 2011, GE stock has had a tough year. Despite, being a truly global company with operations spanning digital, renewable energy, transportation, healthcare and aviation, General Electric hasn’t proved to investors that it can provide both growth and vision. That’s especially important as we enter an era where large companies are constantly fending off the threat of disruption from smaller upstarts.
GE is now facing a crisis of confidence. Despite Flannery’s emphasis on focusing the business and fixing power, the market has shown its doubts, and I have mine as well.
During the third-quarter presentation, management insisted that “sweeping change” was afoot. What may have been closer to the truth is that they are taking a common play out of the “large-conglomerate-in-need-of-change” playbook. Power, in particular, dragged heavily on earnings as a result of lower volume (meaning lower earnings and higher inventory).
Procter & Gamble Co (NYSE:PG), for example, has been actively culling its portfolio of brands. While it had been clear for awhile that PG was in dire need of change, despite a wealth of billion-dollar brands, it arguably took an activist investor to really move things along. PG management, of course, was then forced to make politically correct sounding statement to cover for their slowness in energizing the business.
While it may not be particularly original for a $222 billion market cap company to go “back to basics,” it doesn’t mean that it can’t be effective.
It’s true that PG and GE operate in very different industries, but from the angle of size and stodginess, they both have similar goals to tackle. PG has been executing — how much credit you would like to attribute to Nelson Peltz, the activist investor, versus management, I’ll leave to you — and the difference from a market standpoint is stark. PG is up 6% YTD.
It is, by no means, stellar performance, but it certainly beats 40% in the red. Just something for investors to consider.
With GE however, there isn’t a similar near-term catalyst. Outside investors looking for returns are a pretty compelling one to force management’s hand and barring that, GE shareholders have to just trust that management is taking the necessary steps to right the ship and get the stock price back on the ascent.
There was plenty of speculation going into today’s investor meeting that General Electric would slash its dividend. Sure enough, the once-stalwart of decent yield underwent its third dividend cut in its entire history.
The dividend cut is expected to save General Electric $4.16 billion. But was it actually needed?
General Electric’s cash balance may have declined $13.8 billion from the end of last year, but liquidity remains very comfortable. Real cash flow needs some adjusting given non-cash expenses, but liquidity is by no means tight.
Ultimately, this is a question of the faith that investors may or may not have in Flannery and the broader management team to execute the strategy that management laid out. Talk about drastic, this was both that and unexpected.
Frankly, I didn’t foresee management upsetting an already antsy shareholder base with a dividend cut, and from a financial standpoint, I didn’t see an immediate need to take such an action. GE looks liquid enough to pay out for years to come.
What’s clear though, is that GE is taking the PG play of staying focused on a few sectors and turning Power around. While these may be steps in the right direction, I’m not sure it’s enough to renew my confidence in the team at the top. I’ll need to see real results for that to be restored.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.