October 19, 2018

GE's 119-year-old dividend is on life support

General Electric's 119-year-old dividend is a source of pride inside this once-dependable company.

But GE is no longer reliable. The conglomerate's financial deterioration -- debt is high and earnings firepower is shrinking fast -- could force new GE boss Larry Culp to take an axe to the dividend.

One of the only things that GE bulls and bears on Wall Street seem to agree on is that the dividend will get cut.

"Everyone we speak to expects a huge dividend cut," Barclays analyst Julian Mitchell wrote to clients this week after talking to more than 70 financial institutions about GE.

Even though Mitchell is bullish on GE, the Barclays analyst believes Culp will slash the dividend by 80%. "It could be higher," he wrote.

GE already halved its dividend last November, dealing a blow to the company's retirees and large base of mom-and-pop shareholders. Tellingly, the previous two times GE had to cut its dividend were the Great Depression and in 2009 during the financial crisis.

Dividend cuts are rare right now. Corporate America, flush with cash from the booming economy and huge tax cuts, is handing out dividends like candy these days.

At least 291 S&P 500 companies have hiked their dividend so far this year, according to Howard Silverblatt of S&P Dow Jones Indices. Just two S&P 500 companies have cut their dividend, Silverblatt said.

The problem is that even GE's diminished dividend is still costing the company $4.2 billion a year. The dividend payout is swallowing most or all of GE's projected free cash flow, which has cratered due to its slumping power division and trouble in its financial arm.

Earlier this month, S&P Global Ratings downgraded GE's credit rating and it cited the dividend as a major lever Culp could pull to reduce debt.

GE's earnings firepower will take another hit if the company goes forward with plans to spin off its profitable health care division.

"GE needs the money," said John Inch, an analyst at Gordon Haskett Research Advisors. "A lot of people actually want the dividend cut because it's apparent the company has a serious cash issue on its hands."

Yet cutting the dividend further could accelerate an exodus by the chunk of GE's shareholders that own the stock because of the dividend. JPMorgan Chase analyst C. Stephen Tusa, Jr., another GE skeptic predicting a large dividend cut, estimates about 60% of GE shares are owned by retail and passive money.

"Many GE employees and retirees own the stock, which makes it especially painful. I have sympathy for them," said Martin Sankey, managing director of global equity research at Neuberger Berman.

Should the dividend get put on hold?

Others argue that Culp's role as GE's first-ever outsider CEO frees him to take more drastic action, including potentially suspending the dividend altogether. That's what Goldman Sachs called for in June due to GE's mountain of debt.

"They're going to have to eliminate the dividend. They don't have the balance sheet to support it," said Jack De Gan, chief investment officer at Harbor Advisory, which owned GE shares for 21 years until last fall.

GE declined to comment ahead of its October 30 earnings release. GE has previously promised a "more balanced" mix of dividend payments and investments in the company.

Much will depend on whether Culp follows through on his predecessor John Flannery's plan to get rid of the health care division. The company has acknowledged that the health care spinoff will force it to "adjust" the dividend to reflect smaller cash flow.

'Black box'

A dividend cut, or even suspension, may not solve all of GE's financial problems. Investors are particularly worried about GE Capital, the financial arm stinging from insurance losses and an investigation into its subprime mortgage business.

"GE Capital is a black box," said Inch.

That's why Inch and other analysts argue that GE is likely to seriously explore shoring up its finances by selling billions of dollars of shares to the public. Such a move would water down the holdings of current shareholders. But it could also reduce fears about GE's bloated balance sheet.

Under Flannery, GE denied it needed to do an equity raise. And some analysts believe it would be unwise.

"Their stock is too cheap and they have assets to sell and costs to take out," said Scott Davis, lead analyst at Melius Research.

GE hasn't executed an equity capital raise since 2008, when legendary investor Warren Buffett came to the rescue during the financial crisis.

"If the ship is sinking you don't want to go down with it. So, you plug the leaks," said Inch.

GE doesn't have forever to act. If the company is crumbling during an economic boom and bull market, what will it look during the next recession?

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