General Electric sent some ripples through the market when it announced a 50% dividend cut on November 13.
After the official release, their shares took a 7% dive as CEO John Flannery struggled to reassure his investors. GE’s stock was not exactly doing well prior to this announcement, but this is the biggest reduction the company has shown in recent years.
The CEO has stated that the company is planning to go through a major overhaul, which is to include restructuring its finances, labor force, and long-term goals for 2018 and 2019. Learn more about the story behind the numbers, the reactions across the board, and the likely future of General Electric.
Change Is in the Air
Flannery stated that their free cash flow is now at between $6 and 7 billion, down from $12.58 billion in 2015. GE’s projected earnings for next year have also dropped by 48%. But GE has pledged to turn these numbers back in the right direction.
Flannery made it clear that he wanted the company’s efforts to be focused on health care, energy, and aviation. He believes that concentrating on these sectors will restore the conglomerate to its former glory. He made it clear that the company lacked the vision it once had, but that it could still be saved with clear-cut goals.
GE is planning to decrease the number of directors by half, and increase the level of oversight and accountability of the directors they keep. In addition to the reorganization, many have speculated that the company is set to make a major breakthrough in medical equipment soon.
Pitfalls Ahead
The new CEO has only been in his position for 100 days, and many are critical of the fact that he’s only managed to drag the company down since his start.
This was his first investor day as CEO, and it certainly isn’t the best start for any leader. Analysts have criticized him for not presenting more details about how he’s planning to turn the company around. RBC Capital Markets lowered their ratings because they didn’t think the solutions were realistic or specific enough to fix the numbers — especially after its wildly optimistic projections about the company’s profits.
Swapping out directors for new blood may be just what the company needs to land back on its feet, or it may be an endless game of musical chairs with no winner.
After his announcement to cut dividends, Moody also brought GE’s rating down from top-tier to A2. They cited several reasons for their decision, including the disappointing performance of the power segment as well as the dip in demand for freight locomotives in North America. S&P and Fitch have similarly changed their ratings to reflect the possible risks of investing in GE as well. However, GE shares managed to take an upturn after the news, rebounding nicely at over $18 from $17.50.
RBC Capital Markets has remarked that there’s no reason to believe GE’s recent all-time low was going to be anywhere near the bottom, yet others are confident that holding onto the stock is the right decision to make.
What’s Next
Analysts say that Flannery should have made his cuts even larger to have a prayer of saving the company in the long-term. The real takeaway seems to be that GE was having a difficult time under the prior CEO, and there hasn’t been enough change in the organization to encourage confidence in the company.
Trying to uproot an organization as large and established as GE was never going to be something Flannery could do in 100 days. Many of the problems he’s facing now were obviously inherited, and he may be doing his best to overcome each new obstacle. Yet, his unrealistic predictions for the company may show that Flannery simply doesn’t understand the crux of the challenges ahead. Analysts say his new plan for next year may end up being as disastrous as his first 100 days because no one is learning from their mistakes.
GE’s had some major hiccups in the past few years, but their stock is currently still strong. Health care, power, and energy make up much of this nation’s economy, and GE may be right to focus on what they have rather than trying to pivot right now. But, others say that GE’s focus should be even tighter than what it is now if it hopes to get back to its original status.
Regards,
Ethan Warrick
Editor
Wealth Authority
