By Thomas Gryta
General Electric Co.'s new leader outlined a restructuring plan
that will slash the annual dividend by $4 billion and streamline
the industrial giant's operations, but warned investors it will
take years to fix some of the company's businesses and for profits
to begin to improve.
GE Chief Executive John Flannery lowered earnings targets for
2018 and cautioned that even in 2019 conditions would be difficult,
especially in the company's biggest unit, GE Power. He laid out a
future for three core businesses -- power, aviation and health care
-- and said the company would look to shed smaller divisions such
as transportation and lighting.
GE is "going to be a smaller business, a simpler business" but
2018 is going to be "a reset year," he told investors at a meeting
Monday to unveil the first stages of his strategy. The presentation
followed a strategic review launched after the GE lifer took over
the top job on Aug. 1.
The moves stop short of a breakup or more radical restructuring
of the 125-year-old company that some analysts had called for, but
Mr. Flannery left open the possibility of further portfolio
changes. "It is for the market to decide," the new CEO said Monday.
"Unless I show results, it isn't going to matter."
Shares of GE slumped after his presentation, dropping 7% in
Monday afternoon trading and hitting a new 52-week low of $19. The
stock has now declined nearly 40% this year, missing out on a broad
stock-market rally amid investor disappointment with its
performance.
The company set new financial targets for 2018 that were well
below its previous goals. It now expects adjusted earnings per
share of $1 to $1.07. For years, GE had promised investors it would
deliver $2 a share in 2018 earnings. The company changed CEOs
earlier this year as it began to struggle to reach that target.
Mr. Flannery compared his first 100 days as CEO to his previous
role running GE's health-care division. There was pressure to sell
that unit when he arrived as CEO in 2014, but he found a way to fix
the unit's problems while still keeping open the option to unload
it.
The 30-year GE veteran said he is building a leadership team of
"fresh eyes and people with institutional memory." GE will simplify
the financial metrics it reports, focusing less on driving revenue
growth and more on free cash flow. The company also is revamping
compensation for senior executives, lowering the cash portion and
giving 50% of their pay in equity.
In addition to shedding its century-old transportation and
lighting businesses, Mr. Flannery said the company would look to
sell its stake in Baker Hughes, an oil-field-services provider. GE
owns about 65% of the company, which has a market value of about
$40 billion, after merging its oil-and-gas unit into the business.
Shares of Baker Hughes fell 2% Monday afternoon.
GE 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 Ed Garden, a co-founder of activist Trian Fund Management,
which is a large GE investor.
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. GE would
reduce the payment from $8.4 billion to $4.2 billion, or a dividend
yield of about 2.3%.
The industrial giant is one of the biggest dividend payers in
the U.S., but it has struggled to generate profits and cash flow
from its industrial operations in recent years to cover the
payout.
"We understand this is an extremely painful action for our
shareholders, our owners," Mr. Flannery said. "It's not a decision
we took lightly."
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 company will be more focused when it comes
to future acquisitions, saying its historical performance on deals
has been mixed. He also said the company would make a $6 billion
contribution to pensions funded by debt in 2018, a move that would
fund pensions through 2020.
GE forecast 2018 industrial free cash flow would be $6 billion
to $7 billion, and revealed that it didn't expect a dividend from
its GE Capital unit next year.
When he was named CEO in June, Mr. Flannery said the dividend
was safe, but he 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, a move that
came just weeks after he reassured investors about sustaining the
payout.
Mr. Immelt revamped the company over his 16 years, including
selling media, plastics, appliances and most of financial services.
He also made some ill-timed deals in the oil and power markets.
While the company changed substantially, it didn't increase cash
flow.
Earlier this year, under pressure from Trian, Mr. Immelt pledged
to cut annual spending by $2 billion. After lowering financial
targets last month, Mr. Flannery pledged to cut an additional $1
billion in spending.
GE Capital used to generate substantial profits that flowed to
its parent company. 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.
--Cara Lombardo contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
November 13, 2017 14:12 ET (19:12 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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