General Electric Co. (GE) - Get Report is cutting its dividend for the second time in a decade as new CEO John Flannery confronts the reality of less consistent cash flow after selling most of its lucrative lending business.
The Boston-based company, which last reduced the quarterly payout in 2009, will return 12 cents a year to shareholders instead of the 24 cents it paid in the three months through September, according to a statement prior to the Monday, Nov. 13, investor meeting where CEO John Flannery is detailing his revised strategy for the digital manufacturer.
The shift, expected when the company declares its dividend in December, may save GE about $4 billion a year and comes in tandem with a drastic cut in next year's earnings. Profit of $1 to $1.07 in 2018 is about half GE's earlier prediction of $2 a share, far less than the $2.33 that activist Trian Partners had once argued was possible and even lower than this year's forecast.
"We understand the importance of this decision to our shareowners and we have not made it lightly," said Flannery, who succeeded Jeffrey Immelt in the top job on Aug. 1 and became chairman in October, roughly three months ahead of schedule. "We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow."
Trian declined to comment on GE's decision.
Further complicating the cash outlook is the fact that the parent company didn't take a second-half payout from its remaining lending business, which is evaluating insurance claims reserves, and doesn't expect one next year. The payment was $4 billion in the first six months of 2017.
Along with the reduced investor payout, GE said it would trim its board to 12 members from the current 18. The slate at April's annual meeting will include three new directors that the company said would have "relevant industry experience for GE going forward."
The cut had been the subject of widespread speculation as GE struggled to meet a full-year target of as much as $14 billion in cash from its manufacturing businesses, ending the first half about $200 million in the red.
When GE subsequently cut that goal by half, announced the departure of three vice chairs, including CFO Jeff Bornstein, just days after Immelt's early retirement and awarded activist Trian Partners a seat on its board, the questions intensified. Flannery, under pressure from Trian and other investors to buoy profitability and bolster cash flow, has already slashed costs by eliminating executive perks including the use of corporate jets and company cars.
"The reduction of the dividend, really, is a product of where we are as a company right now," Flannery said during Monday's meeting. "We had a path of industrial cash flow that we thought would grow into that dividend, but it hasn't unfolded that way."
Instead, the manufacturer has, for a number of years, "been paying a dividend greater than our free cash flow," he said.
GE dropped 8% to $18.85 in New York trading late Monday afternoon. The company's shares had previously fallen 27% since Flannery's appointment, compared with a 6.3% gain on the S&P 500.
GE had previously lowered the 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.
"It was the worst day of my tenure as CEO," Immelt said in July. "The dividend is really, I think, incredibly important for investors and for the team."
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