GE hold­ing back div­i­dend will re­set fi­nan­cial met­rics

The National - News - - BUSINESS | IN DEPTH -

It was an­other painful earn­ings day at Gen­eral Elec­tric but this time around, the com­pany may fi­nally be cut­ting deep enough to give its turn­around ef­forts a real chance.

In an­nounc­ing its third-quar­ter re­sults on Tues­day, GE also slashed its div­i­dend to a nom­i­nal penny a share and said it would split its strug­gling power busi­ness into two units to ac­cel­er­ate op­er­at­ing im­prove­ments. GE re­ported a $630 mil­lion loss in its power seg­ment for the quar­ter. That far ex­ceeded an­a­lysts’ ex­pec­ta­tions and dragged GE’s over­all re­sults well be­low heav­ily re­duced es­ti­mates. GE was mum in its press re­lease and pre­sen­ta­tion slide deck on an up­date to its guid­ance for the full year, hav­ing al­ready warned that it would fall short of a pre­vi­ous goal of $1 to $1.07 in ad­justed earn­ings per share and $6 bil­lion of in­dus­trial free cash flow.

The lat­est div­i­dend cut comes al­most ex­actly a year after for­mer chief ex­ec­u­tive John Flan­nery slashed the pay­out and ad­mit­ted GE hadn’t been gen­er­at­ing enough cash for years to sup­port it. I won­dered at the time whether Mr Flan­nery had gone far enough, as the div­i­dend still looked set to soak up a too-high per­cent­age of the com­pany’s cash flow. The fact that more bad news is still trick­ling out of the com­pany is a tes­ta­ment to why Mr Flan­nery was abruptly re­placed with for­mer Dana­her CEO Larry Culp ear­lier this month.

Mr Flan­nery’s heart was in the right place, but his op­er­a­tional turn­around ef­forts tended to af­fect changes only at the edges. Mr Culp, an out­sider, isn’t hand­cuffed by GE’s past to the ex­tent Mr Flan­nery was as a 30-year vet­eran of the com­pany. Tues­day’s changes show Mr Culp isn’t mess­ing around and that GE will look very dif­fer­ent un­der his watch. An­a­lysts had been brac­ing for a div­i­dend cut after GE dis­closed a huge good­will write-down in its power unit in con­junc­tion with Mr Culp’s hir­ing (it now says that will amount to $22bn). But it’s still jar­ring to see a com­pany that was for years known for its lu­cra­tive div­i­dends al­most elim­i­nate its pay­out.

The div­i­dend cut will save GE about $3.9bn a year, cash it very much needs to chip away at its bloated bal­ance sheet and re­duce its re­liance on com­mer­cial pa­per. Moody’s In­vestors Ser­vice at long last put GE’s A2 rat­ing and P-1 short-term grade on re­view for down­grade this month after it be­came ob­vi­ous even for those in the cheap seats that the com­pany’s earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion and debt prospects were un­likely to be any­where in the range of that level of cred­it­wor­thi­ness in the near fu­ture. Stan­dard & Poor’s down­graded GE to BBB+ from A. The down­grades risk cramp­ing GE’s ac­cess to the com­mer­cial pa­per mar­ket.

The split of the power unit is an in­ter­est­ing strat­egy. It es­sen­tially cre­ates a “bad bank” of GE’s gas tur­bine and ser­vices busi­nesses and, if not a “good bank”, then an OK-ish one out of the other as­sets in its power unit in­clud­ing steam, grid so­lu­tions, nu­clear and con­ver­sion. GE’s power busi­ness has been tripped up by a va­ri­ety of fac­tors in­clud­ing mis­man­age­ment and the pur­suit of scale at the ex­pense of pric­ing dis­ci­pline, but per­haps the most dif­fi­cult chal­lenge to over­come is a sec­u­lar weak­en­ing of de­mand for power-plant equip­ment as re­new­able-en­ergy tech­nolo­gies be­come cheaper. What’s some­times over­looked is that not all parts of the busi­ness are ex­posed to

The div­i­dend cut will save GE about $3.9bn a year, cash it very much needs to chip away at its bloated bal­ance sheet

this lat­ter trend.

GE’s in­dus­trial-fo­cused gen­er­a­tion-equip­ment and grid busi­nesses have re­spectable sales out­looks and their value may be over­shad­owed by the is­sues in util­ity-class elec­tric­ity gen­er­a­tion, Bar­clays an­a­lyst Ju­lian Mitchell wrote in a re­port ear­lier this month. This in­ter­nal break-up could be a first step to­ward di­vest­ing those health­ier as­sets or fur­ther iso­lat­ing the trou­ble­some ones.

I’m ac­tu­ally some­what en­cour­aged by GE’s de­ci­sion not to give a for­mal up­date to its guid­ance for 2018. To me, this sug­gests that Mr Culp is plan­ning on fi­nally re­set­ting GE’s fi­nan­cial met­rics closer to GAAP prin­ci­ples, some­thing Mr Flan­nery failed to do. Hope­fully when Mr Culp up­dates in­vestors in more de­tail in early 2019, his out­look will be based on num­bers that ac­tu­ally re­flect the un­der­ly­ing con­di­tion of GE’s busi­nesses.

Here’s to a good start.

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