Several months ago in November 2017 General Electric Company (NYSE:GE) was trading at about $18 per share. I wrote an article at the time warning investors that it was likely for GE to continue falling to new lows before it found a bottom. Fast forward to the end of March and the stock has indeed fallen to less than $13 per share. Ouch. Last week GE was at its lowest point since July 2009 during the depth of the last financial crisis. One reason for the drop was because the company had just cut its dividend by half. This took the dividend yield from 5% down to 2.5%. But the dividend slashing was necessary because the payout ratio in terms of dividend to free cash flow (FCF) was over 100% before. After the cut the dividend/FCF is 60% to 70%. The company needed to align its dividend payment with cash flow generation in order for its operations to stay sustainable. Another change at GE is it’s shrinking its board of directors from 18 members to just 12. Flannery intends to refocus the industrial conglomerate’s sprawling businesses on just three arms eventually – health care, aviation and energy.
GE shares have been underpeforming the markets for many years now. It fell 42% last year, and so far in 2018 it is down about 25%. Part of the issue is its involvement in two ongoing federal investigations – the SEC investigation into GE’s accounting practices and the U.S. Justice Department investigation in connection with subprime mortgages.
The company is facing multiple headwinds as it struggles with its industrial portfolio. One risk it faces is that an economic recession in the United States could further stress its cash generation, which is already weakened recently due to heavy working capital needs related to new product launches in its power and aviation segments. Furthermore it could take years before the massive industrial segment can replace the earnings that GE Capital produced at its peak. Increasing market penetration in European countries is also a big challenge for GE in the near future.
General Electric was the worst performing member of the Dow this past quarter. The only reason GE shares saw a 6.5% jump last week was because rumors had spread that Warren Buffett might be jumping in to buy some shares in the distressed company. But buying a stock based on a rumor is never a good idea. Besides, if the Oracle (NYSE:ORCL) of Omaha were to invest in a company such as General Electric, he would probably not buy the same common shares as retail investors. In fact, 10 years ago Buffett invested $3 billion in GE preferred stock. Preferred shares are superior to common stock, and GE had to pay 10% annual interest perpetually on Buffett’s stake in the company. If it wanted to get out, GE would have the option to repurchase Buffett’s preferred shares for a premium.
Last fall I mentioned in my post that GE was in a mess and it will take at least 3 or 4 quarters to turn the company around. After spinning off most of its financing division and selling its other assets, GE will still a manufacturing company primarily. Manufacturing in the U.S. is simply not growing like it did 50 years ago. In 1967 GE would have been a great investment to buy and hold. But not so much today in 2018. Less than 10% of the U.S. economy is manufacturing. I suggested that investor should wait at least one year before looking at this company again. 3 months doesn’t change much. GE is still in much disarray. Maybe by the end of this year it will be in better financial shape but we shall see.
This author does not have any shares in GE and does not plan to own any within 72 hours of this post.