GE Management Shake-Up Signals More Pain And Another Dividend Cut

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At a time when investors were patiently waiting for some good news from one of the US’s largest industrial conglomerates, General Electric (NYSE:GE) dropped an unwelcome bombshell Monday morning, signaling the string of crises facing this once venerable company are far from over.

GE’s board fired John Flannery, the chairman and chief executive officer who was brought in last year to begin a painful restructuring that would improve the company’s cash flows and restore investor confidence in its value. The fix calls for effectively breaking up the 126-year-old giant, but this latest action shows that GE has yet to fully figure out a way out of the mess that has cost investors billions of dollars as its share price plummeted.

GE Management Shake-Up Signals More Pain And Another Dividend Cut

GE Weekly 2015-2018

Flannery’s replacement, Larry Culp, a current member of the board, was appointed as the new CEO and chairman. Culp is a highly respected industry veteran who, during his 14-year tenure at Danaher (NYSE:DHR) was responsible for spearheading that company’s transformation from an industrial manufacturer to a leading science and technology firm. GE shares jumped 16% after the announcement as Wall Street analysts applauded the move.

However, while investors cheered the possibility of a successful turnaround, GE also announced that it will miss its previously indicated guidance for free cash flow and EPS for 2018 due to weaker performance in its power business. As well, GE will also take a non-cash goodwill impairment charge related to its power business, a move which is likely to wipe out all of the $23 billion goodwill related to this business.

In our view, though, the recent share rally was nothing more than a dead cat bounce. The recovery in GE shares, which have lost more than half of their value in the past year, requires much more painful adjustment than just a few heads rolling.

A new threat to GE’s future recovery is a likely cut in its credit rating. What was stopping credit rating agencies such as Moody’s Investor Service from depriving GE of its investor grade rating was a possible recovery in the company’s crucial power business.

But the company’s admission on Monday that it will fall short of its cash-flow and earnings guidance for 2018 and will take an impairment charge at its power unit removes that barrier. We expect GE’s A2 credit rating to drop several notches in the days to come. If that happens, it will make it tougher for the industrial giant to raise fresh capital from the markets.

As part of its broader restructuring plan to restore the company’s financial health, GE has been pursuing the possibility of a spin-off from its healthcare business while also divesting its stake in oil services firm Baker Hughes, effectively breaking up the company. The spin-off is expected to be completed in the next 12 to 18 months. Once these deals are done, the leaner GE will be left with jet engines, power plants and renewable energy units.

That plan, however, has one major issue which the 55-year-old Culp will have to face as he tries to instill some life into this crippled giant: the demand outlook for its power products, a business that’s central to the company’s turnaround plan, only continues to worsen.

GE’s previous CEOs failed to foresee the massive change taking place in this industry, namely a worldwide shift towards renewable energy, which has significantly cut demand for the turbines companies used to run gas and coal-fired plants. In its latest quarter, revenues in the power sector fell 19%, while profits were down 58%. Orders for new equipment were down 26% at $7.4 billion.

Bottom Line

The latest shake-up of GE’s top management suggests more pain in the shape of cost-cutting and cash preservation is coming. The one obvious potential casualty is the company’s 12-cent-a-share dividend which was cut in half last year, and is now in danger of complete elimination as Culp moves to preserve cash. According to JP Morgan, GE needs $30 billion in cash to pay off debt and meet the expectations of ratings agencies.

We might hear more from the new CEO on October 25, before the market opens, when the company reports Q3 2018 earnings. Still, no matter the results, it seems the ongoing ordeal for GE’s millions of investors who rely on the company’s payouts is far from over. We believe there’s a strong possibility of more disappointment to come.

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