If you own General Electric Company (NYSE:GE) stock, Wednesday’s 7.3% decline was the company’s worst day in almost a decade. That’s saying something given GE stock has lost over half its value since the end of 2016.
GE CEO John Flannery’s talking a good game, doing his best imitation of a chief executive firmly in control.
“… Being deliberate and then moving when things make sense, as opposed to moving just because somebody wants us to — it’s just my style,” Flannery said at an industry conference. “I’m highly confident we will make the decisions with the portfolio as and when [they] unfold, that will be a good decision for the portfolio.”
How can you not be reassured by those words?
The fact is, GE’s a mess.
No amount of handholding and reassurances by Flannery is going to change the fact the hole it’s in is incredibly deep and incredibly wide.
If you’re considering buying GE stock given how low its share price is — except for 2008, the company’s stock hasn’t traded at these levels since 1996 — do yourself a favor and read these three reasons why you absolutely should not buy the stock.
You can thank me later.
Currently, GE’s 48-cent dividend is yielding 3.3%. That seems like a decent return until you consider that 117 other S&P 500 stocks are doing about the same, including Clorox Co (NYSE:CLX) at 3.2%.
That’s not to say Clorox doesn’t have any issues to contend with, because it does — higher oil prices are putting a severe dent in profit margins — but it’s still expected to earn as much as $6.37 a share in 2018.
Coupled with the reality that GE’s lack of free cash flow could result in it suspending or cutting the dividend, if you’re an income investor, you have no business owning its stock.
Utilities are moving away from coal and natural-gas-fired power plants toward solar and wind, potentially leaving GE on the outside looking in.
“Coal and gas-fired plants accounted for just 38 percent of new electricity capacity financed globally last year, down from 71 percent a decade ago, according to Thomson Reuters data,” Reuters reported May 24. “Solar and wind now draw 53 percent of such investment, up from 22 percent [a decade ago].”
In GE’s first-quarter report, the company’s Power segment saw revenues decline by 9% year over year to $7.2 billion. Perhaps the more troubling result was the division’s 29% decline in orders in the quarter from $7.9 billion in Q1 2017.
That’s a clear indication the transition is hurting the company.
Sure, its Renewable Energy business is picking up some of the slack — orders in Q1 were up 15% to $2.4 billion while revenue was down 7% to $1.6 billion — the permanent closure of fossil-fuel plants in the U.S. will also reduce the maintenance revenue it generates from keeping these plants operating.
The double whammy of lower new equipment sales and ongoing service revenue is going to hurt GE in a meaningful way.
Cutting 12,000 jobs at GE Power and $2.5 billion in costs is not going to reverse the trend to solar and wind power generation.
GE’s Financial Obligations
While the latest move by Flannery to spinoff the company’s underperforming transportation unit to Westinghouse Air Brake Technologies Corp (NYSE:WAB) in an $11 billion merger is one more piece of the puzzle gone, it fails to solve GE’s debt problem.
According to Moody’s, GE is getting about $5.4 billion for its transportation business — $2.9 billion in cash and a 9.9% interest in the merged company — but it’s losing out on $450 million in free cash flow while still being saddled with the division’s pension and retiree health benefits.
Currently, GE has $77 billion in debt and a pension deficit of $29 billion. That’s a total financial obligation of $106 billion. Flannery has said GE will borrow another $6 billion in 2018 to reduce the pension shortfall.
So, nothing changes regarding its financial obligations: the debt goes up while the pension deficit goes down, keeping them at $106 billion.
“GE’s balance sheet is a mess,” said Gautam Khanna, an analyst for Cowen & Co in January. “They don’t generate a lot of cash, and they have a severely underfunded pension plan.”
Bottom Line on GE Stock
As I said in April, GE is nowhere near the company it was a decade ago.
Add to this a balance sheet that’s arguably one of the worst of the S&P 500 companies, and you have a stock that should be avoided at all costs.
If you own GE stock, I pity you. If you don’t, it’s better you look elsewhere for your next great investment.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.