General Electric Corp., as part of a turnaround plan announced November 13, halved its common stock dividend, from $.24 to $.12. per quarter, a fifty percent reduction. Wall Street had anticipated this move, but the stock has declined 8 percent following this announcement.
Given GE’s lengthy connection with the locomotive industry, it doesn't seem inappropriate to view the company as a slow moving train wreck, at least in terms of share price performance. Under former CEO Jeffrey Immelt, GE’s stock declined forty percent while the S&P 500 stock index more than doubled. Today’s dividend cut is simply one more in a long list of indignities for shareholders starting in the year 2000 when the stock peaked at about $60 per share. (It is trading a tad below $19 today.)
But since August this Stamford-based conglomerate has had a new Chairman and CEO, John Flannery. The dividend cut and proposed corporate restructuring are on his watch. As an aside, former CEO Immelt begin his corporate tenure by cutting the stock dividend after the financial conflagration at GE capital. Not an auspicious omen.
The company plans to streamline and reorganize around three legacy businesses: power generation, aviation, and healthcare while divesting oil and gas exploration, transportation and the energy connection/lighting businesses. Mr. Flannery and his team hope to collect $20 billion from asset dispositions. In addition, dramatic cost-cutting measures could boost corporate cash flows by a total of $3 billion between 2017 and 2018. You don't need us to tell you that strategically you can't cost-cut your way to growth and profitability. We suspect that new-CEO Flannery knows this too.
Of the remaining business lines, aviation and healthcare look capable of generating at least average earnings growth relative to the broad market. The power business on the other hand, faces “business challenges”, as the presentation slide show put it (as did the soon-to-be- divested oil & gas business). GE managers seem unable to name the real challenge.
The electric utility business both in the U.S. and Europe has become a low growth-no growth business. This looks to be a secular rather than a cyclical challenge. As a result, GE may not see a pickup in demand for its gas turbines, generators, IGCC technologies, and nuclear fuel and support services that the company offers to the power industry around the world.
However, GE is also in the renewables business, particularly on shore and offshore wind turbines as well as hydro generation. From a strategic standpoint, the senior managers of the renewables business want to render the legacy power generation obsolete. Literally they are trying to kick the legacy fossil and nuclear generators off the grid. It must make for interesting conversations over the punch bowl at the annual Christmas party.
We are not experts in corporate strategy. But this house-divided-against-itself internal business dynamic seems self-defeating over the long term. It creates potential conflicts. Should one division be reined in to slow the decline of the other (bigger) division? The renewables business could likely command a much higher PE multiple than the slow growing (at best) legacy electric power generation business. How CEO Flannery handles this divide could well determine his success as CEO.
As for GE’s stock and its proper valuation, right now despite all the tumult the market values the company at about 19 times projected earnings and the dividend yields 2.5 percent. The stocks comprising the Dow Jones Industrial Averages trade at around 19 times estimated earnings and yield about 2.2 percent. In other words, investors currently seem to view GE as an average company. The question is whether the new management can meet those even those expectations with its existing mix of businesses and inherent business conflicts.
by Leonard Hyman and Bill Tilles for Oilprice.com
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