General Electric Co. slashed its 2018 profit forecast and said it was cutting its dividend by half, as the 125-year-old industrial conglomerate seeks to preserve cash for a restructuring under new Chief Executive John Flannery that will focus on three core units.
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The company set new financial targets for 2018 that were well below its previously held goals. It now expects adjusted earnings per share of $1 to $1.07 per share. For years, GE had promised investors it would deliver $2 a share in 2018 earnings but switched CEOs earlier this year as it began to struggle to reach that target.
Mr. Flannery will refocus the company around three business units -- aviation, health care and power -- and look to exit most of the rest of the nearly 300,000-person company's businesses. That means GE would shed its century-old transportation and lighting businesses, as well as its stake in Baker Hughes, an oil-field services provider.
The company also unveiled a restructuring of its board of directors, saying it would reduce its membership to 12 people, including three new members. GE currently has 18 directors, including Mr. Flannery and a representative of activist Trian Fund Management.
The new quarterly dividend will be 12 cents a share, down from 24 cents a share. The change will be effective the next time a dividend is declared, which is expected to be in December.
The industrial giant is one of the biggest dividend payers in the U.S., doling out about $8 billion a year. But it has struggled to generate profits and cash flow from its industrial operations in recent years to cover the payout. Several analysts said they were expecting a potential reduction when Mr. Flannery shared his turnaround strategy with investors.
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"We understand the importance of this decision to our shareowners and we have not made it lightly," Mr. Flannery said in prepared remarks. "We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation."
The company has paid a dividend since 1899 and last cut it in 2009, when it reduced the payout by $9 billion. Mr. Flannery said the latest dividend change is part of his push to make GE "simpler and stronger."
The company is set to hold an investor update Monday morning where Mr. Flannery is expected to unveil his plans for the company that will focus on three of its biggest business lines but stop short of a breakup or radical restructuring.
GE shares, down 35% this year, rose about 1% premarket to $20.71.
Wall Street was widely expecting a dividend cut but differed on the size. RBC Capital recently projected a 30% to 60% cut based on the stock's value and options trading.
Scott Davis, of Melius Research, said he was surprised at the new 12-cent level as he had expected 14 cents. He said early trading in the stock didn't show a big drop, which he considered a "good sign."
When he was named CEO in June, Mr. Flannery said the dividend was safe but recently warned that his thinking had evolved during his portfolio review. Former CEO Jeff Immelt referred to cutting the dividend as the worst day of his tenure, coming just weeks after he reassured investors about sustaining the payout.
In cutting the dividend, saving about $4 billion a year, Mr. Flannery is making a move his predecessor didn't: resetting financial expectations at the beginning of his tenure. Many GE watchers view Mr. Immelt's not changing targets when he took over in 2001 as a major misstep.
Mr. Immelt revamped the company over his 16 years, including selling media, plastics, appliances and most of financial services, but also made some ill-timed deals on the oil patch and power markets. While the company changed substantially, it didn't adjust cash flow.
Earlier this year, under pressure from activist Trian Fund Management, Mr. Immelt pledged to cut annual spending by $2 billion, but that may not bring enough savings to cover the cost of dividend, capital investment, debt and other uses of cash. After lowering financial targets last month, Mr. Flannery pledged to cut an additional $1 billion in spending.
On Friday, analyst Jeff Sprague at Vertical Research Partners analyst said GE's industrial businesses haven't covered the cost of the dividend for five years but relied on the mostly gone financial services business to help close the gap.
GE Capital used to generate substantial profits that flowed to its parent company, but after the financial crisis the unit struggled with hefty losses and Mr. Immelt began to pare back the lending business. In the latest quarter, GE Capital didn't pay a dividend to its parent, saying it needed to set aside funds for potential insurance reserves.
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(END) Dow Jones Newswires
November 13, 2017 09:06 ET (14:06 GMT)