2017 has not been kind to General Electric Company (NYSE:GE) shareholders. As of this writing, it's down more than 25% as the Dow Jones Industrial Average has been hitting all-times highs throughout the year.
So what gives? Why are investors punishing General Electric? To fully understand the scope of the issues with General Electric, we have to go all the way back to before the housing recession hit US Stocks. This will allow us to see why this stock is lagging now and will help us to better understand where the stock may be headed in the coming years.
Where General Electric Went Wrong
Back in the booming early 2000’s, General Electric made a costly mistake. It allowed its finance unit to grow in size so that it was the main driver of earnings and revenues. With all of the easy money on soaring housing prices, all looked good.
But then housing prices stopped rising and began to fall. Stocks took a hit and this included General Electric. In fact, GE was one of the hardest hit non-financial stocks at the time.
To get the company and stock price moving again, General Electric started to sell off some units and slashed its dividend.
Shareholders, while not loving the slashed dividend, did enjoy a modest recovery of the stock price. GE looked to be on its way back to the old reliable stock it once was.
But then 2017 hit.
Where General Electric Stands Today
The restructuring of the company is now complete and GE is left with 6 core business units:
- Power generation
- Oil and gas drilling
- Transportation
- Aviation
- Healthcare
The sixth unit is the finance unit. With the restructuring, this unit is now the lender for the other 5 business units. This is in stark contrast to when the finance unit was there to earn income from credit cards and other outside-facing financial transactions.
Even though the restructuring is complete, all is not well for General Electric in the short term. These business units are still adjusting to today's economic climate. As these adjustments are made, there will be one-time expenses that hit the bottom line.
This is shown in the earnings reports. For the third-quarter, earnings per share came in at $0.29, which missed estimates by $0.20. Revenues were up by 14%, coming in at $33 billion and beating estimates by $910 million.
Some of the business units are performing well, while others are complete drags on the bottom line. Because of this, GE cut its guidance for full year 2017.
Where General Electric Goes From Here
So what's next for GE and should you own the stock?
For starters, the company is looking to shed more segments within its core business units. One segment that is drawing attention as a possible candidate is the lighting segment.
GE CEO John Flannery has also started an aggressive cost-cutting campaign to help bring back GE.
But the looming question is over the dividend. With a current yield of over 4%, cutting the dividend is an easy way for the company to keep more cash on hand to continue the rebuilding process.
Many experts agree the dividend will be cut in the coming weeks, with some estimating a cut of at least 30%.
So should you buy General Electric? If you take a long-term position on the stock, then this could be a good investment for your money.
The stock is beaten down. The only thing that would knock it down further is a dividend cut, which many are expecting. It's tough to say whether or not this cut is baked into the current share price.
In any case, if I were a long-term investor, I would consider slowly buying shares of GE. I would take my time as the company isn’t going to reclaim its glory overnight.
But the restructuring is complete. Cost cutting is happening. It is just a matter of time now before all of the wheels start spinning again.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.