General Electric Cutting Dividend in Half -- 3rd Update

By Thomas Gryta Features Dow Jones Newswires

General Electric Co.'s new leader outlined a restructuring plan that will slash the annual dividend by $4 billion and streamline the industrial giant's operations, but warned investors it will take years to fix some of the company's businesses and for profits to begin to improve.

Continue Reading Below

GE Chief Executive John Flannery lowered earnings targets for 2018 and cautioned that even in 2019 conditions would be difficult, especially in the company's biggest unit, GE Power. He laid out a future for three core businesses -- power, aviation and health care -- and said the company would look to shed smaller divisions such as transportation and lighting.

GE is "going to be a smaller business, a simpler business" but 2018 is going to be "a reset year," he told investors at a meeting Monday to unveil the first stages of his strategy. The presentation followed a strategic review launched after the GE lifer took over the top job on Aug. 1.

The moves stop short of a breakup or more radical restructuring of the 125-year-old company that some analysts had called for, but Mr. Flannery left open the possibility of further portfolio changes. "It is for the market to decide," the new CEO said Monday. "Unless I show results, it isn't going to matter."

Shares of GE slumped after his presentation, dropping 7% in Monday afternoon trading and hitting a new 52-week low of $19. The stock has now declined nearly 40% this year, missing out on a broad stock-market rally amid investor disappointment with its performance.

The company set new financial targets for 2018 that were well below its previous goals. It now expects adjusted earnings per share of $1 to $1.07. For years, GE had promised investors it would deliver $2 a share in 2018 earnings. The company changed CEOs earlier this year as it began to struggle to reach that target.

Continue Reading Below

Mr. Flannery compared his first 100 days as CEO to his previous role running GE's health-care division. There was pressure to sell that unit when he arrived as CEO in 2014, but he found a way to fix the unit's problems while still keeping open the option to unload it.

The 30-year GE veteran said he is building a leadership team of "fresh eyes and people with institutional memory." GE will simplify the financial metrics it reports, focusing less on driving revenue growth and more on free cash flow. The company also is revamping compensation for senior executives, lowering the cash portion and giving 50% of their pay in equity.

In addition to shedding its century-old transportation and lighting businesses, Mr. Flannery said the company would look to sell its stake in Baker Hughes, an oil-field-services provider. GE owns about 65% of the company, which has a market value of about $40 billion, after merging its oil-and-gas unit into the business. Shares of Baker Hughes fell 2% Monday afternoon.

GE 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 Ed Garden, a co-founder of activist Trian Fund Management, which is a large GE investor.

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. GE would reduce the payment from $8.4 billion to $4.2 billion, or a dividend yield of about 2.3%.

The industrial giant is one of the biggest dividend payers in the U.S., but it has struggled to generate profits and cash flow from its industrial operations in recent years to cover the payout.

"We understand this is an extremely painful action for our shareholders, our owners," Mr. Flannery said. "It's not a decision we took lightly."

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 company will be more focused when it comes to future acquisitions, saying its historical performance on deals has been mixed. He also said the company would make a $6 billion contribution to pensions funded by debt in 2018, a move that would fund pensions through 2020.

GE forecast 2018 industrial free cash flow would be $6 billion to $7 billion, and revealed that it didn't expect a dividend from its GE Capital unit next year.

When he was named CEO in June, Mr. Flannery said the dividend was safe, but he 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, a move that came just weeks after he reassured investors about sustaining the payout.

Mr. Immelt revamped the company over his 16 years, including selling media, plastics, appliances and most of financial services. He also made some ill-timed deals in the oil and power markets. While the company changed substantially, it didn't increase cash flow.

Earlier this year, under pressure from Trian, Mr. Immelt pledged to cut annual spending by $2 billion. After lowering financial targets last month, Mr. Flannery pledged to cut an additional $1 billion in spending.

GE Capital used to generate substantial profits that flowed to its parent company. 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.

--Cara Lombardo contributed to this article.

Write to Thomas Gryta at thomas.gryta@wsj.com

(END) Dow Jones Newswires

November 13, 2017 14:12 ET (19:12 GMT)