The common objective opinion in the market is that blue-chip companies typically pay a nice dividend to investors, and you can always count on them to have your back. General Electric (GE), the iconic power conglomerate originally founded by Thomas Edison himself, has been, for decades, a company that supports the blue-chip theory. Up until recently, GE (GE) remained in the green, but after months of radio silence, the company’s CEO Larry Culp is faced with reviving his dying company and reinsuring his shareholder’s investments.
However, on Tuesday, it seems as though Culp made matters much worse. The company, via Culp, announced that beginning in 2019, quarterly dividends for shareholders will amount to roughly $0.01 per share in an effort analyst believe may “free up cash for the beleaguered company once treasured by shareholders for its payout.”
“The dividend cut to close 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.”
–Stephen Tusa, analyst J.P. Morgan
Culp’s decision to cut the company’s quarterly dividends represents is the first major move during his first month as GE’s (GE) chief executive officer. On Oct. 1, the company’s previous chief executive, John Flannery was removed from his position as a result of the board’s dissatisfaction with “the execution that was taking place under (his) leadership,” CNBC’s Andrew Sorkin said on “Squawk Box,” citing sources.
According to CNBC and several other media outlets, Flannery’s removal was largely driven by the “slow pace of change” under his leadership, and not driven by the power business’ woes.” At the time of Flannery’s removal, the company’s shares had fallen to a nine-year low, trading at $11.27 per share. During Flannery’s time as CEO, the company announced that there were multiple issues with its newest line of natural gas-fired power turbines. GE’s (GE) Power Chief Executive Russel Stokes explained, in a blog post on his LinkedIn profile, the issues related to the “HA turbines.”
“More recently, we identified an issue that we expect to impact our HA units. It involves an oxidation issue that affects the lifespan of a single blade component.”
–Russel Stokes, Power Chief Executive General Electric
Imagine the collective concerns of GE’s (GE) shareholders as well as new CEO Larry Culp that arose from the mess made under the auspices of John Flannery. Suffice to say, when Culp was named to the position on the same day his predecessor was removed, his work was cut out for him.
As a result of Culp’s dividend cut, GE (GE)reportedly expects to retain about $4 billion in cash a year. Many analysts believe GE (GE) will try to raise capital after the company’s dividend cut to create a safety net for the future of the company, but Culp immediately responded to these allegations, saying he has “no plans for an equity raise.”
While the industrial conglomerate’s energy department has dealt with multiple snafus over the course of the last year, GE’s (GE) aviation department has managed to withstand harsh conditions and safely reach their destination, posting a near 7% increase in profits from last year, according to CNBC. In the interest of preserving what’s left of GE’s (GE) power division, Culp announced on Tuesday, that the division will be reorganized as a gas products and services business, rather than one that sells turbines to gas and coal-fired power plants as it has in the past.
Analysts believe Culp’s decision to do away with the dividend is an absolute necessity if GE (GE) stands any chance of mending its wounds from the last year, but Jack Degan, chief investment officer at Harbor Advisor, is concerned for the effect this will have on the company’s long-time shareholders:
“Although I agree with the decision to eliminate the dividend because they certainly need that extra cash for restricting and dealing with liabilities like a dramatically underfunded pension, this is going to be painful for those individual shareholders who love on their dividend.
–Jack Degan, chief investment officer, Harbor Advisory
Look, its a pretty bold move on Larry Culp’s part, but after inheriting a dying power company replete with a myriad of issues, while still being expected to ensure the company’s performance, this decision makes sense. Only time will tell as to whether the company’s shareholders and the market feel the same way.