General
Electric slashed its quarterly dividend Tuesday to just a penny a
share starting in 2019, the second dividend cut in a year and a dramatic move
by new Chairman and CEO Larry Culp to free up cash for the beleaguered company
once treasured by shareholders for its payout.
The dividend cut came as GE reported
adjusted third-quarter earnings of 14 cents a share, 6 cents below Wall Street
forecasts collected by Refinitiv. Revenue for the quarter fell 4 percent to
$29.57 billion, also less than expected. On a GAAP basis, the company lost
$2.63 a share in the quarter.
"Fundamentally this is worse
than expected on profits," J.P. Morgan's Stephen Tusa said in a note to
investors after the report.
The company also said it will divide
its ailing power division into two units, with the business segment taking much
of Culp's attention in his first month on the job. GE took a $22 billion
noncash charge in the third-quarter related to acquisitions made in the power
business.
GE said on the conference call with
shareholders that the SEC was expanding the scope of its ongoing
accounting investigation of the company to include that goodwill charge. GE
tock fell as far as $10.50 a share in Tuesday trading after that disclosure, a
new nine-year low, despite an initially positive reaction to the earnings
report and dividend cut.
The industrial conglomerate expects
to retain about $3.9 billion in cash a year as a result of the dividend cut.
While Wall Street analysts have speculated GE may raise capital after a
dividend cut to give a buffer for the company's future, Culp dismissed that
idea on the company's conference call, saying GE has "no plans for an
equity raise."
"The dividend cut to close to
zero will help on this front, but we also don't think the cut is a silver
bullet, and the severity highlights the challenged capital position here,"
Tusa said.
The quarter's results were "far
from our full potential," Culp said in a statement after the
first earnings report under his leadership. He called for a heightened "sense
of urgency" and increased "accountability across the organization to
deliver better results."
GE's aviation business remained
strong in the quarter, posting a 7 percent increase in profits from last year.
But J.P. Morgan does not "believe Aviation can sustain these types of
results," Tusa said, especially since the power business "is bad and
certainly nowhere near as salvageable as Bulls think."
"There is still much
information to come and wood chop for the new CEO," Tusa added.
Culp and GE have "no room for
error," said Gordon Haskett analyst John Inch. The company's business of
selling turbines to gas and coal-fired power plants had already been suffering
in recent years as utilities ramped up construction of solar and wind farms.
GE's power division will be reorganized as a gas products and services business
and a business of power's remaining assets of steam, grid solutions, nuclear
and power conversion.
Appointed on Oct. 1, Culp was
brought in after former CEO John Flannery frustrated the GE board
with his slow pace of change. GE announced Oct. 12 it would delay its
third-quarter report by five days to give Culp a full month to catch up. GE
expects to fall short of its previous guidance for both earnings and free cash
flow in 2018 but did not include an update to its guidance in the quarterly
report.
"If the aviation business
cracks in the slightest, watch out below," Inch said. "It is going to
take a very, very long time to turn things around."
"Although I agree with the
decision to eliminate the dividend because they certainly need that extra cash
for restructuring and dealing with liabilities like a dramatically underfunded
pension, this is going to be painful for those individual shareholders who live
on their dividend," Jack Degan, chief investment officer at Harbor
Advisory and longtime GE shareholder, said on CNBC's "Squawk
Box," citing retired workers.
But Degan called the dividend cut
"bold action" by Culp and said it's a sign "we're going to see
more bold action with the portfolio."
Click here for the original
article.