Commentary

Analysts See Little Light In General Electric's Turnaround Plans

As jarring as new chairman and CEO John Flannery’s plans to shake up and reenergize General Electric may be, apparently Wall Street isn’t buying it. At least, not yet.

“GE is one of the biggest mistakes of my career,” CNBC’s Jim Cramer, whose charitable trust owns shares in the unwieldy conglomerate-in-the-unmaking, confessed yesterday. “I don't want to talk against my [investment], but I don't know how it’s possible anyone thinks it should be worth $20,” referencing where it opened Monday. “There’s just a lot that's wrong.”

Sure enough, after Flannery laid out his strategy to analysts an its long-anticipated investor’s meeting in New York, shares dropped 7.2%, closing at $19.02. “The stock hadn't fallen that much in one day since March 30, 2009. It's down 40% this year and trading at five-year lows,” according to an AP report.

advertisement

advertisement

Flannery announced that the company will be “cutting its dividend for only the second time since 1938” — from 24 cents a share to 12 cents — “and will divest two of its longest-held divisions, including the remainder of the lighting business created by Thomas Edison, as a part an effort … to revive the storied conglomerate,” Ed Crooks reports for Financial Times

“We understand the importance of this decision to our shareowners and we have not made it lightly. We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation,” Flannery said about the dividend cut in a statement released before the meeting got underway.

“GE has long been one of Wall Street’s biggest dividend payers, behind the likes of Exxon and Apple. Everyone from individual investors to pensions to foundations have relied for decades on the GE dividend,” writes Thomas Heath for the Washington Post. It last slashed the dividend in 2009, following the financial crisis. The move is swimming against the tide.

“Many companies today are increasing their dividend payouts amid a strong stock market and stable economy. But investors have suspected a dividend cut was on the horizon after General Electric’s third-quarter earnings missed the mark. The company trimmed its full-year guidance, another grim sign,” writes Lucinda Shen for Fortune.

“As part of the overhaul, GE is also planning to shake up its board, with fewer and better qualified directors and closer scrutiny of capital allocation decisions including acquisitions,” the FT’s Crooks also points out.

Flannery “said the company would build its future around its aviation, health care and power segments. It will jettison most everything else. Those other parts include a locomotive business, a large investment in oil exploration company Baker Hughes and GE’s lightbulb business,” Heath elaborates.

“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,” Thomas Gryta reports for the Wall Street Journal

He, and the corporate communications team, clearly have a challenge convincing others that it is evolving into something more attractive, however.

“Mike Bailey, director of research at FBB Capital Partners, called the news out of GE on Monday a ‘train wreck’ that ‘left a bad taste in everyone’s mouth.’ FBB, a wealth manager with $1 billion in assets under management, has about $5 million of clients’ money in GE stock,” the WSJ’s Gryta writes. “For FBB’s clients, GE’s dividend cut came as a surprise, Bailey said. ‘Most investors thought GE was a sleep-at-night stock,’ he added.”

Brooke Sutherland’s lede over at Bloomberg Gadfly is indicative of the tough path GE faces in restoring credibility: “General Electric Co. may have a new leader, but the pattern of over-promising and under-delivering is the same,” she writes, pointing out that its “dividend will still soak up a lot of its cash.” 

Further on, she opines, “the piecemeal divestitures GE is targeting won't cut it. Even if it gets rid of transportation and lighting, the company is still huge and highly diverse.”

Over at Forbes, Antoine Gara sees some hope in the revamped, trimmer board. 

“Activist hedge fund Trian Partners may play a role as GE cleans house. Amid its 2017 tailspin, GE invited Trian's Nelson Peltz to join its board of directors,” he reminds us. “… The smaller, reshaped board may create a new mindset. Peltz has agitated for a restructuring of old line conglomerates like DuPont , Ingersoll Rand and more recently Procter and Gamble.”

But the reality, he concludes, is that “the company, once a blue chip stock, is now a turnaround play.”

That’s always a challenging story for marcomm to craft. Flannery, for his part, is trying.

“Flannery, 56, sought to portray the path ahead not as a retreat but as an inspiring challenge,” Steve Lohr reports for the New York Times.

“This is the opportunity of a lifetime to reinvent an iconic company,” Flannery said.

Next story loading loading..