7. Accounting and Balance Sheet Questions
When GE replaced its CFO and other top lieutenants, there was some concern about what this might mean regarding GE’s books, either in the past or ahead. There have been accounting settlements in the past and reports of implementing an accounting standard update, but we will not go so far as to use the formal terms “mistakes” and “irregularities.” Both are very bad for investors, and the end result remains unknown.
Anytime there are sweeping changes, drastically lowered earnings and the new head honcho calling results unacceptable, there may be worries by investors about what disclosures may be coming. Problems around long-term care and turbines are there, but the reality is that GE already has shed so many assets and is committing to shedding more of its less profitable divisions or operations that it’s hard to imagine what risks are ahead in the books of a company this spread out in businesses and geographies.
Understanding GE’s balance sheet also requires advanced accounting knowledge, and sometimes the feeling that it requires understanding alchemy. Bloomberg said ahead of the third-quarter earnings that GE issues four earnings per share numbers and that the adjusted profit obscures actual performance. Whether Flannery cleans house swiftly and rapidly or takes his time, GE could continue to be a very hard company to analyze by the books.
8. Dividend Cut and Capital Allocations
Two analysts speculated ahead of earnings that GE would have to cut its dividend. Immelt vehemently denied this, but Flannery was far less committed to the actual rate of the dividend versus having a dividend. In a CNBC interview he even went as far to say he was not emotional about a dividend. His view is that if you should pay a dividend then pay it, if it was to buy back stock then buy the stock, and if it was for an acquisition then that is what to do. GE’s all-in cash flow and the GE Capital dividend paid to the parent is lower.
24/7 Wall St. predicted that GE needed to cut its dividend going into the Great Recession to save literally tens of thousands of jobs. At this time, a dividend yield above 4% is just too high, and Flannery can say Immelt raised its payout too much without taking the blame. Get ready for a GE dividend cut, or get ready for the company to face more financial leverage concerns if it doesn’t. GE’s dividend liability for the common stock is more than $8 billion.
9. Ratings Agencies to Endlessly Review GE
The credit ratings have gone through their case of downs after missing so much in mortgage and credit risk ahead of the Great Recession. Still, they are not bashed every day anymore and it turns out that domestic and global bond investors have to still rely on some outside credit analysis on what bonds they can or cannot hold.
GE is going to face multiple credit ratings reviews for years from the likes of S&P, Moody’s and Fitch. If the company lowers the dividend, it may be credit-positive for debt holders, depending on the logic. If GE’s earnings power remains soft for years, or if the parent is dragged down by too many units, then the credit ratings will keep voicing concern. GE used to be a solid Triple-A credit rating, but those days are long gone. Unfortunately, GE’s debt holders and equity holders may have to read credit rating reports for years into the future.
10. Understanding That Huge Ships Take Years to Turn
GE’s loyalists and investors need to understand that this is not just a ship that needs to be turned around. It is a whole armada. Think about restructuring and layoffs. Think about asset sales and acquisitions. Think about how long it takes to get the right team (or teams) in place, as well as cutting mistakes along the way. Think about changing dividend and capital allocation. And think about all the outside pressure that will be headed Flannery’s way.
Investors have a hard time expecting that a large ship takes a long time to turn around. Now imagine turning around a whole armada full of different units that have to all be transformed into the new GE culture. GE’s stock may make different voting reactions up and down as a scorecard for how the GE turnaround looks ahead, but it seems reasonable to expect that it could be late in 2018 or well into 2019 before long-term investors have a full handle on what the new GE is going to be.