GE’S CEO SIGNALS SWEEPING MAKEOVER
NEW YORK • General Electric Co.’ s new boss has barely uttered a word in public during his first two months on the job. But Chief Executive Officer John Flannery is already signaling his intention to forge one of the most sweeping makeovers in the company’s 125-year history.
It can’t come soon enough. Even after adding an activist shareholder to the board on Monday and announcing the exit of a trio of senior executives, GE fell the most in a month. That erased a small gain for October, putting the stock on pace for its longest streak without a monthly advance since 1978.
Flannery is even likely to consider paring the dividend for the first time since the global financial crisis, according to Vertical Research Partners and JPMorgan Chase & Co., as GE contends with weak cash flows and sluggish demand in the power- generation and oil markets.
And the company’s earning outlook — a probable component of Flannery’s presentation next month on his plan to revitalize GE — is at risk.
“With such uncertainty here and challenged fundamentals,’’ the likelihood of a dividend cut “moves materially higher,’’ Steve Tusa, an analyst at JPMorgan Chase, said in a note to clients on Monday. The shares dropped almost four per cent Monday to close at US$ 23.43 in New York.
GE had tumbled 23 per cent this year through Friday, the biggest swoon on the Dow Jones.
“If earnings and cash flow are going even lower than we thought, the dividend clearly should be cut,’’ analyst Jeff Sprague of Vertical Research said in an Oct. 6 note. “GE could end up in a better place once the dust settles but investors should steer clear until we learn more. That better place could be with a starting point much lower for the stock price.’’
Flannery accepted a board appointment for Ed Garden, a founding partner of activist shareholder Trian Fund Management, which has been pressuring GE for an overhaul. Garden, who works closely with Trian’s Nelson Peltz, will replace Robert Lane on the board, GE said in a statement Monday. The Boston- based maker of jet engines, gas turbines and ultrasound machines maintains “active and constructive dialogue” with Trian, according to the statement.
“Like other GE shareholders, I am disappointed by the recent performance of GE’s stock,” Garden said in the statement. “But I continue to believe that GE represents an attractive long- term investment opportunity with significant upside.”
Flannery has been meeting with investors and has said he will consider all options to turn the company around. He’s weighing changes to the company’s port- folio of businesses. He has cut services such as corporate jets and company cars as part of an existing plan to eliminate US$ 2 billion of costs through 2018. Analysts believe he may reduce expenses by an even greater amount.
The face of GE shifted dramatically last week as several of the company’s most well- known executives, including Chief Financial Officer Jeff Bornstein, stepped down.
Vice- chairs Beth Comstock, GE’s top female executive and a leading figure in its embrace of Silicon Valley, and John Rice, the primary international officer, also said they would retire. The departures, announced late on Oct. 6, came shortly after Jeffrey Immelt stepped down as chairman earlier than planned.
Jamie Miller, who heads GE Transportation, was appointed CFO.
Bornstein’s resignation comes after he was passed over to succeed Immelt. When Flannery’s appointment was announced, Bornstein, 51, was promoted to vice- chair and the company said he would work closely with the new boss.
The departing CFO was regarded among investors and analysts as a knowledgeable and plain- spoken partner to Immelt’s big- vision CEO.
Bornstein, who joined GE in 1989 and held a number of finance- oriented roles, was considered a major driver of GE’s plan to shed about US$ 200 billion of lending businesses and refocus on industrial manufacturing.
But Bornstein’s star faded in recent months as he shouldered some of the blame for GE’s cash- flow issues.
The executive changes “serve to build expectations that game- changing strategic moves will be unveiled’’ at t he Nov. 13 meeting, Deane Dray, an analyst with RBC Capital Markets, said in a note to clients.
Analysts expect profit this year of US$ 1.54 a share, according to the average of estimates compiled by Bloomberg, less than GE’s forecast of at least US$ 1.60. While GE has discussed earnings of US$ 2 a share in 2018, analysts are predicting US$1.67 on average.
A dividend cut may be necessary since the existing payout “consumes all or most’’ of GE’s industrial free cash flow for the foreseeable future, Sprague said. GE has said maintaining the payout is a top priority and has declined to comment on the possibility of a dividend cut.
The company cut its dividend in 2009 during the financial crisis, the first such move for GE since the Great Depression. The company pays an annual dividend of 96 cents, for a yield of 3.9 per cent.
GE COULD END UP IN A BETTER PLACE ONCE THE DUST SETTLES.