General Electric (GE) now trades at a low we haven’t seen since 2009.
In fact, the last time GE was this cheap, we were beginning to recover from the 2008 financial meltdown. A year after trading at $30, the stock just hit an historic low of $7.72.
GE Dividend Cut to a Penny
The price plunge is a result of the decision to cut the quarterly dividend from twelve cents to just a penny.
"When we announced on our earnings conference call that we were taking our dividend down to 4 cents a year, we didn't do anything positive for our retail shareholder base and they have been exiting the stock, I think, as a result," Culp told CNBC.
This is the second cut in a year – a dramatic move by the CEO to free up cash for the beleaguered company. Once held in high regard for its sizable payouts, it’s now forced to make the cut to retain $3.9 billion in cash for the year.
While this cut won’t sit well with those that were living on GE dividends, it’s a bold, needed action by Culp to keep more assets as the company restructures. For those hoping for a revived dividend, it’s unlikely to happen any time soon.
At the moment, its biggest priority is cutting its debt, and that doesn’t give it much room to think about raising dividends, sad to say.
GE’s Financial Condition is on Life Support
Not helping the situation, the company recently reported adjusted third quarter EPS of 14 cents a share – six cents below Street expectations. Revenue fell 4% to $29.57 billion, which was also less than projected. On a GAAP basis, the company lost $2.63 a share in the quarter.
On top of that, many of its businesses have shrinking revenues. Power revenues for example plunged 33% to $5.7 billion. Transportation fell 2% to $900 million. Lighting dropped 18%. While its aviation business saw a 12% jump in revenue to $7.5 billion with a 22% profit margin, that’s not enough to offset the negatives of its other businesses.
The company is also sitting on $100 billion in liabilities with no enterprise free cash flow, note analysts, even after the dividend cut.
GE also took a $22 billion non-cash charge in the quarter related to acquisitions.
"Fundamentally this is worse than expected on profits," J.P. Morgan's Stephen Tusa said, as quoted by CNBC.
Things went from bad to worse after Culp also noted the company’s power business was “getting close” to a bottom, indicating that problems still persist. Then again, that’s not a shock when the power business is seeing dropping global demand and turbine blade failures. That’s on top of the disclosure of a criminal probe into GE accounting.
“We do not think the businesses are fundamentally broken. However, modeling an appropriate near-term trough has proven difficult,” Credit Suisse analyst John Walsh said, as quoted by The Wall Street Journal. He added “poor visibility into fundamentals coupled with uncertainty around liabilities keep us sidelined.”
Despite its well-known name, we think it’s best to avoid GE until it addresses some of its issues.
Over time, The Cheap Investor will dig further into the stock if we see a solid value. Stay tuned.