General Electric Co. (GE) stunned investors Friday morning when it reported
a major miss in third-quarter earnings despite higher revenue. For the quarter, adjusted EPS came in at $0.29 versus expectations for $0.49. Revenue was $33.47 billion, slightly above analysts' expectations of $32.56 billion.
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During the company’s earnings call, GE executives including new CEO John Flannery, departing CFO Jeffery Bornstein and incoming CFO Jamie Miller discussed the results, as well as the future. Here are three key takeaways:
1) The dividend is a priority
At the beginning of the call, Flannery said that the company’s dividend is a “priority” in capital allocation. The company is in the process of finalizing its 2018 capital allocation framework and will elaborate on its plans at an investor update on Nov. 13. In the Q&A period of the call, a UBS analyst questioned the sustainability of the dividend; whether the company has the free cash flow to fund dividends with such a high payout ratio without jeopardizing spending for future growth.
Flannery noted that free cash flow use needs to balance investing for growth and paying dividends. He added that, currently, the company has cash flow to pay its dividends at the current rate through 2017, and that they expect an improvement in free cash flow in 2018.
2) GE is targeting aggressive cost cuts, major changes needed
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GE is working on improving its businesses. The review underway during the last 90 days made it clear that “major” changes will be needed, with these latest results “unacceptable,” according to Flannery.
The board has given Flannery a mandate to look at the company with no constraints. Flannery noted that the review of the business has been exhausting, and they are leaving no stone unturned. Every segment is being rigorously reviewed, and even the 18 board members will be assessed. There are concerns from the investment community about both the board’s size, and how it has let the company’s financial health deteriorate.
Flannery estimates that there is room to cut more than $2 billion in costs next year.
3) 2018 will be a “reset” year
GE’s latest results included some major restructuring charges. GE’s leaders are moving to simplify their company and will sell $20 billion in assets in the next 1-2 years. This will pave the way for 2018 to be a reset year, where the company will lay the foundations for growth in cash, earnings and margins – in 2019 and beyond.