With a new leader at the helm, GE may be reconsidering its dividend, according to analysts.
General Electric Co. (GE) surged on Monday, Oct. 1, after the beleaguered industrial conglomerate replaced its Chief Executive Officer and said it will take a non-cash goodwill impairment charge of about $23 billion for troubles related to its Power business. These changes, however, are prompting renewed calls to adjust the company's dividend.
"We believe the language [of] writing down all of Power's goodwill and recognizing both cash and [earnings per share] shortfalls set the stage for re-baselining the company, dividend policy and capital deployment again," said UBS analyst Steven Winoker.
"In light of the cash shortfall, and the dividend of $4.2 billion this year, the dividend / [free cash flow] ratio will most likely now be above 80% in 2018," Barclays analysts wrote in a research note. "Given the amount of internal issues that still need to be worked through, restructuring and investment spend most likely has to move up rather than down in the coming years which may lead to a larger reduction to the medium-term dividend than was previously expected."
Similarly, Bank of America Merrill Lynch analyst Andrew Obin said he expects GE to take "additional steps" to protect its credit rating due to declining Power profitability and cash flow, and expects "a significant cut to [the] dividend earlier than previously expected."
Credit rating giant Moody's cautioned in April that GE's rating could be downgraded if "Moody's expects that revenues in the Power segment will be subject to further declines beyond 2019."
Still, not all believe the impairment charge will directly impact the dividend.
"The only way I could see an impairment charge affecting a dividend would be if it reduced retained earnings to a negative amount," said Chuck Mulford, an accounting professor at Georgia Institute of Technology 's Scheller College of Business. "A dividend paid from negative retained earnings would be a liquidating dividend and firms may not want to do that."
"In the case of GE, their retained earnings are more than sufficient to absorb the goodwill impairment charge, so, because it is non-cash, I don't see it threatening the dividend," Mulford said.
Previously, former GE CEO John Flannery said in late June that the company that the company would maintain current quarterly dividend through the completion of the Healthcare spinoff. The Healthcare business, which generated $19 billion in revenues in 2017, will become a standalone company in the next 10 to 16 months.
"At that time, the new GE Healthcare Board of Directors will determine GE Healthcare's dividend policy, which GE expects to reflect healthcare industry practices," the company said in a June 26 statement. "Also at that time, the GE board expects to adjust the GE dividend with a target dividend policy in line with industrial peers."
GE did not provide any additional commentary on the changes outside of the press release today.
Larry Culp, 55, will replace Flannery "effective immediately," the company said. Culp takes over the helm of GE after joining the company's board in April. Prior to joining the board, Culp was the CEO of Danaher Corp. between 2001 and 2014. During his tenure at the diversified conglomerate, Culp led the company to better revenue and increased the market capitalization. In addition to his new role at GE, Culp serves as a director for T. Rowe Price Group Inc. (TROW) , according to BoardEx, a relationship mapping service of TheStreet Inc.
"We will be working very hard in the coming weeks to drive superior execution, and we will move with urgency," Culp said in a statement. "We remain committed to strengthening the balance sheet including deleveraging."
J.P. Morgan analyst Stephen Tusa, who has a Sell rating on the stock, said in May that GE needs to "a cut to the dividend to help with operation de-levering." Meanwhile, Goldman Sachs analysts suggested in late June that the company should suspend its common dividend for the next 18 months to avoid another dividend cut and a potential rating downgrade.
GE shares jumped 8.9% to $12.29 at 1:30 p.m. New York time.