General Electric Cutting Dividend in Half -- 3rd Update
November 13 2017 - 9:21AM
Dow Jones News
By Thomas Gryta and Cara Lombardo
General Electric Co. slashed its 2018 profit forecast and said
it was cutting its dividend by half, as the 125-year-old industrial
conglomerate seeks to preserve cash for a restructuring under new
Chief Executive John Flannery that will focus on three core
units.
The company set new financial targets for 2018 that were well
below its previously held goals. It now expects adjusted earnings
per share of $1 to $1.07 per share. For years, GE had promised
investors it would deliver $2 a share in 2018 earnings but switched
CEOs earlier this year as it began to struggle to reach that
target.
Mr. Flannery will refocus the company around three business
units -- aviation, health care and power -- and look to exit most
of the rest of the nearly 300,000-person company's businesses. That
means GE would shed its century-old transportation and lighting
businesses, as well as its stake in Baker Hughes, an oil-field
services provider.
The company also unveiled a restructuring of its board of
directors, saying it would reduce its membership to 12 people,
including three new members. GE currently has 18 directors,
including Mr. Flannery and a representative of activist Trian Fund
Management.
The new quarterly dividend will be 12 cents a share, down from
24 cents a share. The change will be effective the next time a
dividend is declared, which is expected to be in December.
The industrial giant is one of the biggest dividend payers in
the U.S., doling out about $8 billion a year. But it has struggled
to generate profits and cash flow from its industrial operations in
recent years to cover the payout. Several analysts said they were
expecting a potential reduction when Mr. Flannery shared his
turnaround strategy with investors.
"We understand the importance of this decision to our
shareowners and we have not made it lightly," Mr. Flannery said in
prepared remarks. "We are focused on driving total shareholder
return and believe this is the right decision to align our dividend
payout to cash flow generation."
The company has paid a dividend since 1899 and last cut it in
2009, when it reduced the payout by $9 billion. Mr. Flannery said
the latest dividend change is part of his push to make GE "simpler
and stronger."
The company is set to hold an investor update Monday morning
where Mr. Flannery is expected to unveil his plans for the company
that will focus on three of its biggest business lines but stop
short of a breakup or radical restructuring.
GE shares, down 35% this year, rose about 1% premarket to
$20.71.
Wall Street was widely expecting a dividend cut but differed on
the size. RBC Capital recently projected a 30% to 60% cut based on
the stock's value and options trading.
Scott Davis, of Melius Research, said he was surprised at the
new 12-cent level as he had expected 14 cents. He said early
trading in the stock didn't show a big drop, which he considered a
"good sign."
When he was named CEO in June, Mr. Flannery said the dividend
was safe but recently warned that his thinking had evolved during
his portfolio review. Former CEO Jeff Immelt referred to cutting
the dividend as the worst day of his tenure, coming just weeks
after he reassured investors about sustaining the payout.
In cutting the dividend, saving about $4 billion a year, Mr.
Flannery is making a move his predecessor didn't: resetting
financial expectations at the beginning of his tenure. Many GE
watchers view Mr. Immelt's not changing targets when he took over
in 2001 as a major misstep.
Mr. Immelt revamped the company over his 16 years, including
selling media, plastics, appliances and most of financial services,
but also made some ill-timed deals on the oil patch and power
markets. While the company changed substantially, it didn't adjust
cash flow.
Earlier this year, under pressure from activist Trian Fund
Management, Mr. Immelt pledged to cut annual spending by $2
billion, but that may not bring enough savings to cover the cost of
dividend, capital investment, debt and other uses of cash. After
lowering financial targets last month, Mr. Flannery pledged to cut
an additional $1 billion in spending.
On Friday, analyst Jeff Sprague at Vertical Research Partners
analyst said GE's industrial businesses haven't covered the cost of
the dividend for five years but relied on the mostly gone financial
services business to help close the gap.
GE Capital used to generate substantial profits that flowed to
its parent company, but after the financial crisis the unit
struggled with hefty losses and Mr. Immelt began to pare back the
lending business. In the latest quarter, GE Capital didn't pay a
dividend to its parent, saying it needed to set aside funds for
potential insurance reserves.
Write to Thomas Gryta at thomas.gryta@wsj.com and Cara Lombardo
at cara.lombardo@wsj.com
(END) Dow Jones Newswires
November 13, 2017 09:06 ET (14:06 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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