Why General Electric’s Strategy Must Be About More Than the Dividend

November 10, 2017 by Paul Ausick

Source: Wikimedia Commons
On Monday, November 13, at 9 a.m. ET, General Electric Co. (NYSE: GE) CEO John Flannery will present his much-anticipated strategy to turn around the venerable industrial giant. It is hard to find anyone who does not believe that a reduction of the company’s $0.96 per share annual dividend will be at the top of the list of things to go, even if Flannery saves the announcement until the end of his presentation.

When the company reported dismal third-quarter results, Flannery said “we are focused on redefining our culture, running our businesses better, and reducing our complexity.”

So far he has worked on redefining the culture by grounding the corporate fleet of airplanes and reducing the number of executives who are supplied with a company car. He is also expected to announce formally that the staff at the company’s new Boston headquarters will be reduced from the 800 jobs originally planned. Other measures to run the businesses better will almost certainly include more layoffs for the 300,000 people GE employs.

And as for reducing complexity, Flannery is likely to confirm that GE is looking to divest its railroad business. The new CEO, who took over on August 1, has already said he plans to divest more than $20 billion assets. That will certainly reduce complexity.

Flannery’s chore on Monday is to weave these threads into a narrative tapestry that investors and analysts both understand and accept. Former CEO Jeff Immelt spun off the bulk of GE’s financial business, sold off its media and appliances businesses, and bought an oilfield services company. Did it get too little for what it sold off and pay much for what it bought?

While Flannery probably can’t rake Immelt’s decisions over the coals, he at least needs to serve up a compelling narrative explaining what he is going to do and why. The “how” can come later.

Then there’s the dividend. Generally speaking, when a company cuts its dividend the share price takes some punishment, and if there’s anything GE does not need it’s more punishment for a stock price that is down by about 37% to date in 2017.

The temptation to avoid that pain may prevent Flannery from snipping the dividend, but if he chooses to take that course he’ll need to explain how he plans to improve GE’s cash flow, which fell by 40% on an adjusted basis year over year in the third quarter and is down 53% for the first nine months of the year. On a GAAP basis, the quarterly drop was 82% and the nine-month drop was 99%.

A compelling strategy and simple story explaining it could allow GE to shave its dividend without an extraordinary hit to the share price. Yes, there is likely to be more pain, but if the company shows it can execute on the new strategy and that it is paying off, the pain may be short-lived.

Shares of GE recently traded at $20.26, within a 52-week range of $19.63 to $32.38 and with a consensus price target of $27.60. Over the past 52 weeks, the stock is down more than 33% as of Friday morning. The company’s market cap is about $176 billion.