GE's New Vision Fails To Convince Markets
Shares in General Electric, fell for a second day to near six year lows on Wall Street as investors reacted negatively to its moves to cut its dividend by 50%, focus on three of its biggest business lines, perhaps sell down its 60% plus stake in Baker Hughes, the third biggest US oil services group, and cut tens of thousands of jobs in the process.
The shares lost more than 7% on Tuesday hitting an intra day low of $US17.50 before bouncing to end around $US17.80.
That was after a fall of 7.2% on Monday and the stock is now down 44% so far this year, while the Dow is up 18%
Tuesday’s fall came after more analysts abandoned the company and questioned the rationale for the attempts to kick start the company’s lagging performance.
The quarterly dividend will be cut in half to 12 US cents a share. It will the lowest quarterly dividend since 2010 - a move that has seen thousands of shareholders who had owned the stock for its 96 cents a share of dividend income a year.
RBC Capital analyst Deane Dray, who had been one of just five of 19 analysts surveyed by data group, FactSet who were bullish on GE, cut his rating on the company onTuesday to sector perform, as he now believes the company’s turnaround will be “more protracted than previously anticipated.”
“While the market was not expecting any quick fixes, we believe that CEO John Flannery’s highly anticipated plan fell short of expectations regarding the scope of the business model/portfolio changes,” Dray wrote in a note to clients. “We viewed the new disclosures about missteps at Power and [free cash flow] shortfalls as particularly unsettling.”
Mr Flannery said in his statement on Monday: “We understand the importance of this decision to our shareowners and we have not made it lightly. We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation.”
But the company says official changes to way it recognises revenue will also have a negative impact on the company’s cash flow, or the way it reports its cash flow.
The company also said that because of new revenue recognition rules that go into effect in January, which were approved by the Securities and Exchange Commission about three years ago, would lead it to report 2017 industrial free cash flow of $US3 billion compared with how it currently reports industrial cash flow from operating activities of $US7 billion.
“The bottom line is that Mr. Flannery’s plan fell short of the sweeping reset that investors were looking for after the five-month wait,” analysts Dray wrote.
Mr Flannery said GE’s underlying earnings per share, which the company had been targeting at $2 for next year, are now expected to be in a range of just $US1-$US1.07, little changed from this year’s expected earnings of $US1.04-$US1.12. That was a surprise to many in the markets as well. Some US investors worry the asset sales and slimming will see GE’s earnings fall too sharply. Mr Flannery will focus on GE’s aviation, power and health-care divisions. The CEO will look to exit most of the rest of its operations. Around a dozen business in all will be sold. That means GE will sell off its transportation unit, one of the oldest and biggest makers of diesel locomotives, as well as GE Lighting, which traces its roots to back Thomas Edison and makes LED bulbs and energy management sensors. The company may eventually shed its majority stake in Baker Hughes, which became a separate public company in July after merging with GE’s oil and gas operations. Baker Hughes is worth more than $US37 billion and its sale could finance a lot of the restructuring Flannery reckons GE needs. As part of the overhaul, GE is also planning to shake up its board, while three new directors will be found, the total will be cut to 12 from 18 at the moment.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.