GE Slides to 2-Year-Low as Earnings Gloom Overshadows Safe Dividend

GE may be facing an earnings reset 'to a lower number off of which future growth is uncertain and realistically below average,' JPMorgan warns.
By James Langford ,

General Electric Co. (GE) - Get Report sank to the lowest price in more than two years amid growing concern that boosting depressed profits and cash flow will take longer for new CEO John Flannery than investors want.

Flannery, who moved into the top job on Aug. 1 after longtime chief Jeffrey Immelt announced his retirement, has promised to outline his strategy in November for delivering earnings growth while maintaining the Boston-based conglomerate's dividend. The 56-year-old has also committed to improving accountability to shareholders, who include Trian Partners, the activist firm led by Nelson Peltz.

"Bottom line, there are more negatives than positives," Stephen Tusa, a JPMorgan Chase & Co. analyst who has an underweight, or sell, rating on the shares, said in a note to clients on Thursday, Sept. 7. His 12-month price target of $22 is about an 8% drop from Friday's price of $23.82, which was the lowest since August 2015.

GE will probably miss its full-year manufacturing cash-generation goal of $12 billion by about $500 million, Tusa wrote, while likely 2018 earnings of $1.53 a share are well below an original goal of as much as $2. The challenges are driven by weakness in the power business as well as a less-than-expected bounce in the oil, gas and locomotive markets 

The manufacturer founded by Thomas Edison in the late 1800s may be facing an earnings reset "to a lower number off of which future growth is uncertain and realistically below average, different from a 'kitchen sink,' which implies a base that is unrealistically depressed and can snap back," he wrote.

After GE reported that it was $200 million in the red on cash from industrial operations for the first six months of the year, then-CEO Immelt assured investors cash flow would improve. Still, executives warned that cash from manufacturing would come in "at the lower end" of GE's original forecast of $12 billion to $14 billion -- and that meeting the goal would depend in part on natural resource markets.

The 61-year-old, who remains chairman through the end of December, has spent years streamlining the sprawling conglomerate he inherited from predecessor Jack Welch by exiting businesses such as television and appliances to focus on digital manufacturing, where he sees the potential for dramatic growth.

Whether the new CEO will sell more businesses remains an open question, at least until November.

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"A broad breakup of the portfolio is unlikely at this stage, but we expect Flannery to articulate further scope for non-core asset disposals," Nigel Coe, an analyst with Morgan Stanley who has the equivalent of a hold rating on the shares, said in a note to clients on Tuesday, Sept. 5. "We see lighting, hydro, power conversion and potentially transportation falling into the jump-ball category."

Immelt and Flannery have both committed to maintaining GE's dividend, which currently totals 96 cents a share on an annual basis -- or about $8 billion, despite questions about whether disappointing cash flow would prompt a cut.

GE has lowered its dividend only twice in its history, once during the Great Depression in 1938 and again in 2009 as Immelt shored up the company's cash buffers amid the global financial crisis. That reduction, from 31 cents a quarter to 10 cents, saved about $9 billion a year, GE said at the time.

"We believe that the dividend is not even a debate at the board level," wrote Morgan Stanley's Coe, whose 12-month price target is $26. Still, he said, questions remain about a payout ratio including dividends and stock buybacks that consumes most of free cash flow, since "investors do not want the dividend to be funded, even in part, from asset sales."

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