It’s a terrible feeling to pile on the back of General Electric Company (NYSE:GE). GE stock was one of the first stocks I ever purchased and it did very well for me. It also tripled off the low of the mortgage crisis. Alas, GE stock has been flailing for some time. I think it is going to get worse, and it all pretty much can be laid at the feet of Jeffrey Immelt.
I know some investors want to bottom fish. Some investors think that GE stock is bargain and it can’t go much lower. And some investors think a dividend cut is unthinkable. To this, all I can offer is a quote from Battlestar Galactica:
“All of this has happened before, and it will happen again.”
GE Stock Has a Problem
GE stock DID cut its dividend after the mortgage crisis, from $0.31 to $0.10. General Electric will do everything it can to avoid cutting the dividend because if that happens, selling will certainly accelerate. Many retired investors believe in GE because they’ve probably held GE stock a very long time.
There’s a problem for GE. The company divested its entire financial business, appliances and water systems. That means less revenue, and struggles in the other divisions have resulted in less cash flow.
GE has been free-cash-flow negative for several quarters. In the last four alone, FCF was negative to the tune of $576 million, $185 million, $1.16 billion and $460 million. Yet GE still paid out a total of $8.6 billion. That means the total cash drain on GE was almost $11 billion.
Now, GE does have $78 billion of cash on hand, so there is that backstop. The problem is GE needs a lot of cash to get its business running again. So paying the dividend from cash is fine … for now. Otherwise, though, the dividend has to be cut, or cash flow must increase, or funds have to be raised via debt or equity. That would be awful. Borrowing money or diluting shareholders to maintain a dividend?
However, if you think the situation with GE stock price is as bad as it can get, I give you Teva Pharmaceutical Industries Limited (NYSE:TEVA). Every time I thought TEVA had hit bottom, I was proven wrong. There was just more and more bad news. Yet it was bad news that was ultimately always there if one cared to see it. I see GE in the same way.
Bottom Line on GE Stock
GE is just so massive that it is going to take the new CEO a long time to figure out how to get everything humming again. He has to decide what to sell, what to keep, what to invest in, what to do about the dividend, and then figure out how to grow all the divisions that GE owns.
This will not happen overnight, or even in a year or two. The stock market is unforgiving anyway, and especially so right now. With all these other stocks making new highs, institutions do not have the patience to hold a turn-around. All it takes is one more bad piece of GE news and the stock will fall again.
Nor is GE a bargain. With FY17 EPS pegged at $1.10, GE stock trades at about 18x EPS. Were GE throwing off regular cash flow in vast excess of its dividend payout, and growing even a little bit, justifying an 18x multiple would be difficult. Instead, it is still seeing YOY declines.
Sell GE stock. Don’t look back.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].