General Electric stock is down more than 40% year to date and is at a six year low. Meanwhile, the Dow Jones industrial average stock market index has returned about 19% so far this year. Not surprisingly GE is the worst performing Dow component in 2017. The stock has been in free fall recently because it’s earnings have disappointed investors. The former CEO, Jeff Immelt, now retired, had not been very forthcoming about GE’s potential problems when he left the company. The company’s new CEO John Flannery has started making drastic changes that should help make the business more lean. Flannery says he would cut thousands of corporate-level jobs and scale back of GE’s global structure. He also intends to close GE’s Shanghai, Munich and Rio de Janeiro research centers, leaving the international conglomerate with just two global research sites in Niskayuna, a down of twenty two thousand population in New York, and Bangalore in India.
A major problem for GE was it’s financial arm, GE Capital, which it has now sold most of. GE also sold its media arm, NBC universal. Last year it sold its appliance business to China’s Haier Group. The company is trying to sell another $20 billion of assets to get out of businesses it can’t win in. GE is currently trading at roughly $18/share. According to Jim Cramer it could be close to bottoming out. “I interviewed CEO John Flannery [Tuesday] on Squawk on the Street and I have to tell you, I think that in the end, this company — which could earn $1.06 in 2018 — is close to a bottom,” Cramer said during a private conference call with members of his “Action Alerts PLUS club for investors. Cramer said he thinks that GE shares, which fell 2 cents to $18.25 Thursday, could bottom out at $17.”
But I don’t think it will stop at $17. It is more likely for GE to continue falling to $15 per share before it’s able to find its bottom. One reason is because the company has recently cut its dividend by half. This took the dividend yield from 5% down to 2.5%. But this is necessary because the payout ratio in terms of dividend to free cash flow (FCF) was over 100% before. After the cut the dividend/FCF is 60% to 70%. The company needed to align its dividend payment with cash flow generation. Otherwise its dividends would not be sustainable. Even if the company can succeed in its future plans the dividend should remain at these new levels for at least a year before going up again. Another change at GE is it’s shrinking its board of directors from 18 members to just 12. Flannery intends to refocus the industrial conglomerate’s sprawling businesses on just three arms eventually – health care, aviation and energy.
David Fingold VP and Portfolio Manager of Dynamic Funds, explains that it’s not a good sign when a company is trying to sell assets during the bottom of a cycle. “If they have to sell those assets and are admitting it’s the bottom of the cycle, that says something about their balance sheet.” He thinks if any investors own GE, they should get out.
At the end of the day GE is in a mess and it will take at least 3 or 4 quarters to turn the company around. After spinning off most of its financing division and selling its other assets, GE will still a manufacturing company primarily. Manufacturing in the U.S. is simply not growing like it did 50 years ago. In 1967 GE would have been a great investment to buy and hold. But not so much today in 2017. Less than 10% of the U.S. economy is manufacturing. Even though GE has fallen a lot this year, it is still overvalued because we simply don’t know whether or not Flannery can turn his around. I would wait at least 1 year before considering to buy GE. Maybe by then the company will be in better financial shape.