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Chart of the Day / Why it’s Best to Avoid General Electric (GE) Like the Plague

Why it’s Best to Avoid General Electric (GE) Like the Plague

November 13, 2018

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 just beginning to recover from the 2008 financial meltdown.  Just a year after trading at $30, the stock just hit an historic low of $7.72.

GE Dividend Cut to a Penny

All thanks in part to CEO Larry Culp’s decision to cut the quarterly dividend 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 now 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 bold, needed action by Culp to keep the company and stock afloat, we believe. For those hoping for a revived dividend, near-term, it’s unlikely to happen any time soon.

At the moment, its biggest priority is cutting its debt.

That doesn’t give it much room to think about raising dividends again, sad to say.

GE’s Financial Condition is on Life Support

Not helping, 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 expected.  On a GAAP basis, the company lost $2.63 a share in the quarter.

On top of that, many of its businesses have contracting revenues.  Power revenues for example fell 33% to $5.7 billion.  Transportation fell 2% to $900 million. Lighting tell 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 will persist.  Then again, that’s not a shock when that business is seeing dropping global demand and turbine blade failures.  That’s on top of a disclosed 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.”

At the moment, it’s best to avoid a stock like GE like the plague.