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GE can’t escape the math demanding a dividend cut

By Brooke Sutherland / BloombergNEW YORK — General Electric Co.’s Judgment Day is nigh.

New CEO John Flannery’s three-month tenure has so far been rocked by management upheaval, a disastrous earnings report and a GE stock in freefall. On Monday, he was finally set to unveil his plans for resuscitating this fallen titan of American industry at a make-or-break investor meeting. All manner of breakups are being speculated, but one thing is almost certain to happen, and that’s a cut to GE’s vaunted dividend.

GE’s businesses aren’t bankrupt, but the magnitude of its dividend payout no longer matches the size and cash-generation capabilities of the company following a series of large divestitures. 

GE expects to generate just $7 billion in cash flow from its industrial operations this year — well short of its initial $12 billion to $14 billion goal — after big earnings misses in its power and energy businesses. After backing out pension and capital expenditure commitments, that leaves it with only about $2 billion of industrial free cash flow against a dividend that costs more than $8 billion annually. Given that math, a cut makes sense. That doesn’t mean it won’t be painful.

GE’s shareholder base includes a large number of individual investors who have stuck with the stock in part because of the dividend. Many of them are still bitter about when GE CEO Jeff Immelt had to cut the payout during the financial crisis — rightfully so, I might add. What’s jarring about this latest looming slash is that it will come at a time when most industrial companies are doing quite well. GE is one of just 13 companies on the 68-member S&P 500 Industrial Index to have a losing year.

Since 2009, dividend cuts among S&P 500 industrial companies have been few and far between, according to data compiled by Bloomberg Dividend Forecasting analyst Matthew Coburn. Fastenal Co.’s dividend fluctuated between 2011 and 2013. A small group of others including Arconic Inc. and the former Tyco International (now Johnson Controls International Plc) have reset their payouts in conjunction with meaningful restructurings of their businesses through spinoffs. And all of those companies are much, much smaller than GE, which even after its epic slide this year has a market value of about $175 billion.

Should GE cut its dividend — and that seems all but inevitable at this point — expect shares of the company to fall as some retail holders capitulate. Any reduction will go down especially poorly if it’s not also accommodated by either a full-scale breakup or at least a meaningful effort to streamline GE’s conglomerate structure.

In the long run, it’s probably not such a bad thing to reset GE to a more reasonable payout ratio as the company seeks to find its footing. Cutting its dividend in half would reduce GE’s payout to 44 percent of its normalized trailing 12-month income, slightly below the median of 48 percent for the entire Dow Jones Industrial Average. Boeing Co., whose dividend payout ratio matches the median, has returned more than 70 percent this year, the best for the index.

I don’t think GE is poised for that kind of rebound any time soon. But a drastic dividend cut would represent a commitment to radical change. And that’s just the kind of thinking GE needs right now. 

Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.Speech

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