Why Some GE Investors Welcome Another Dividend Cut

Wall St. Journal

Thomas Gryta

Oct 28, 2018

Investors in General Electric Co. GE +2.26% are bracing for the troubled company to slash or suspend its dividend when it reports quarterly results this week. For some, such a cut may come as a relief.

Dividend cuts don’t usually bring positive reactions, but investors, analysts and former executives hope the limping industrial giant will spend cash on fixing its businesses rather than mail checks to shareholders.

“Given GE’s grim cash backdrop, the bigger the cut the better, in our opinion,” said John Inch, an analyst with Gordon Haskett Research Advisors, who said his polling shows that investors expect a dividend cut.

GE is scheduled to report third-quarter results Tuesday morning, after delaying the release by a week to give new Chief Executive Larry Culp, who took over on Oct. 1, more time to review the business.

The company already planned to reduce the annual dividend of 48 cents a share after spinning off its health-care business, a move that isn’t expected to be completed until after this year. But earlier this month, GE warned that cash flow and earnings would fall below its 2018 goals because of its struggling power division.

“GE’s current and future free-cash generation prospects are not sufficient to support the dividend,” said Martin Sankey, a senior research analyst at Neuberger Berman, an investment manager that held 1.1 million GE shares as of the end of June. “Prudence would call for the cut to occur sooner rather than later.”

GE has previously said it is confident in its cash position. A spokeswoman declined to comment further.

The Boston-based giant had $27.7 billion in cash at the end of June. But excluding restricted funds and cash held at GE Capital, there was $6 billion on hand. It has about $40 billion in total credit lines available. The company had $115 billion of total debt as of June 30, including its finance arm GE Capital.

In July, GE forecast that its industrial businesses would generate about $6 billion in adjusted free cash flow for the year, down from $9.7 billion last year and $11.6 billion in 2016. It had forecast adjusted per-share earnings at the low end of a range of $1 to $1.07. Analysts currently project 88 cents a share, according to Thomson Reuters.

A dividend cut would mark the second such reduction in a year and complete a reversal for a company that has been one of the most widely held stocks and one of the biggest dividend payers. Since 2000, GE has doled out more than $150 billion in dividends.

But as cash flow and profits have evaporated, GE has been forced to retrench. In June, it set plans to sell or spin off two major business units and slash costs at the remaining operations. Mr. Culp, an outsider who joined the board in April, took over as CEO earlier this month when John Flannery, a GE veteran, was fired after 14 months in the role.

GE shares ended Friday at $11.30, down about 50% so far this year and near its lowest levels since the 2008 financial crisis. The stock has surrendered all the gains it made in the days after Mr. Culp was named as CEO.

On Tuesday, the third-quarter financial performance will be scrutinized but all ears will be on Mr. Culp in his first public appearance as CEO. He has yet to hold a conference call or address investors, although he has spoken to some institutional shareholders.

Mr. Culp has been reviewing the company in his first weeks, with a focus on the struggling power division, which makes equipment for electricity-generation plants, according to people familiar with the matter.

The company warned earlier this month it could take an accounting charge of $23 billion for previous acquisitions in the power business. It also is in the process of fixing a major defect in a new model of its biggest turbines. The trouble in the business—GE’s largest—have put the division’s leadership in the hot seat.

Another issue is the state of GE Capital, the once lucrative financial-services business that has become a source of setbacks for GE. Earlier this year, GE disclosed it needed to set aside $15 billion for a shortfall in reserves in a legacy insurance business.

Analysts expect adjusted third-quarter earnings of 20 cents a share on revenue of $29.9 billion, according to Thomson Reuters. In the same period a year ago, GE earned 29 cents a share on $33.5 billion.

The key question about Mr. Culp is whether he will run GE like he ran Danaher Corp., a small conglomerate that recorded steady growth during his 14 years in charge.

Danaher didn’t pay much of a dividend while Mr. Culp was at the helm there. It never paid out more than $100 million in annual dividends during his tenure. One former Danaher executive said Mr. Culp prefers to reinvest cash for the benefit of shareholders rather than issue large dividends.

That approach would differ drastically from GE’s history, it which it has typically paid out handsome dividends to its large retail shareholder base. Former CEO Jeffrey Immelt cut the dividend during the financial crisis for the first time since the Great Depression, a move he later often called the worst day of his life.

When Mr. Flannery cut the dividend in half last November, he expressed similar feelings but revealed that GE hadn’t produced enough cash flow to cover the annual payment in years. That reduction cut the annual dividend cost to about $4 billion from $8 billion.

Julian Mitchell of Barclays expects GE to maintain a dividend of some sort, even if it is tiny, to minimize the fallout from the cut. “A token dividend could help ward off some forced selling by income funds,” he said.

To raise some cash, Mr. Mitchell and other analysts said GE could accelerate some of its planned asset sales, like its 62.5% stake in oil-and-gas firm Baker Hughes, a GE Co. GE is restricted from selling its stake, currently worth about $19 billion, until July 2019 under an agreement reached in 2016 to merge its energy business into Baker Hughes .

The other option for GE is to suspend the dividend while it gets back on its feet. BP PLC made such a move in 2010 when it stopped its dividend to help pay for the massive cleanup of an oil spill in the Gulf of Mexico, resuming a lower dividend a year later.

“Suspension allows for cash to rebuild and then when the company is healthier it can start paying out again,” said Melius analyst Scott Davis, who is in favor of the temporary halt at GE rather than eliminating the dividend altogether.