How Safe Are General Electric and Its Dividend?
That's really the best reaction to General Electric's (NYSE: GE) stock price chart for the past couple of years. Shares are down about 60% since the beginning of 2017. But for the past six months, the stock price has been fairly stable, mostly staying in the $12/share to $15/share range. The company's current dividend yield of 4.7% isn't too shabby, either.
That could mean that the bleeding has finally stopped and that the stock market is ready to reward GE shareholders (finally) with some gains. Or it could just be a temporary lull in the tempest that has surrounded the company lately.
Let's take a closer look at GE's situation to see whether it's a safe bet for investors.
Baby with the bathwater
Just because a company hasn't been performing well in the past doesn't necessarily mean it's not going to outperform in the future. That's particularly true of GE, given how drastically its portfolio has changed over the past decade. Finance, which once made up 40% of GE's revenue, now comprises less than 10%. It sold its stake in NBC Universal in 2013 -- exiting the media business altogether -- and its consumer appliance unit. It's also on track to dump its oil and gas, transportation, healthcare, and consumer lighting businesses. Plus, it's also winding down its investments in the Industrial Internet of Things (IIoT).
Some of these businesses that GE is exiting -- in particular, oil and gas, consumer lighting, and IIoT -- were long-time underperformers, whose departures will help streamline the company's structure as well as bring in some much-needed capital. But the margins for the transportation and healthcare businesses were comparatively strong, and while that will make them more attractive to buyers, they also won't be around to help offset the company's struggling power segment, a core GE business that has fallen on tough times. By loading up GE Healthcare with debt and pension obligations, though, before cutting it loose, GE will be able to further strengthen its balance sheet.
When the dust settles, GE will be left with a much cleaner balance sheet and a strong aviation business that will be left to prop up the power unit and the small renewable energy unit. What's left of the once-mighty GE Capital arm will primarily be limited to offering financing to the company's industrial customers. But even with its underperforming businesses sold and its balance sheet refreshed, GE might not be a safe investment.
Turn on the juice
So far in 2018, the power unit has been a proverbial millstone around GE's neck. While just 10 years ago, the unit managed to generate a 17.5% profit margin, in the first six months of this year, it's averaged just 4.7%: yikes again. Even worse, in Q1 2018, management lowered the unit's earnings guidance by half a billion dollars to $1.95 billion. Double yikes!
CEO John Flannery was upfront about the power unit's problems in the most recent earnings call. "The biggest challenge we face continues to be working through the turnaround of our power business," he said. "The market continues to be difficult, with softness in orders putting pressure on our cash flow and working capital."
And it's not just equipment orders that are flagging; service revenue is down as well, by 17% in Q2 2018 once dispositions are factored in. Considering that service revenue generally sports higher margins than equipment sales for GE, that's particularly concerning. The company isn't projecting a turnaround in the power market until at least 2020, which means this may be the status quo for the next two years.
Of most concern is the lack of a clear turnaround plan beyond some further talk of restructuring. On the most recent earnings call, Flannery indicated that GE just plans to try to ride this weak market out, saying, "I don't see any change to our core strategy with the [power] business; our core approach to what we see in the market."
That might be the best strategy available...but it doesn't necessarily make it a good strategy for achieving growth.
The best case
If GE's projected scenario is that its power unit won't turn around until 2020 at the earliest, what happens if things don't go according to plan?
It looks as though GE might miss its already-downgraded income forecasts for the year. Profits from the power unit totaled just $694 million in the first half of 2018, which means it would have to achieve about $1.25 billion in profits in the second half of the year to meet its current $1.95 billion guidance. That seems...optimistic.
And if the power market contracts rather than holding steady, or if competition ramps up the pricing pressure even further, or -- a worst-case scenario -- if the market for aircraft engines slows down, GE could find itself unable to meet even its modest profit goals. If that happens, the share price is likely to fall even farther, which could trigger another dividend cut (which isn't a farfetched possibility, even under current conditions).
The bottom line is that there's no guarantee that the stock price will recover quickly, or even slowly, or that it won't drop even farther. Super yikes.
Flannery has made some painful -- but necessary -- moves to right the corporate ship, and the new, leaner corporation boasts a formidable asset in its strong aviation division. Unfortunately, Flannery's just about out of arrows in his quiver, and even he admits that there's nothing he can do to speed up a recovery in power markets. If all goes according to plan, investors can expect to comfort themselves with a 4% dividend for a couple years while they await a turnaround.
But unfortunately, it's possible that GE will underperform its modest goals, the share price will tumble, and the dividend will be cut (again). Any further unforeseen hurdle for the company would make a share price drop and/or a dividend cut even more likely.
There are much safer places for your money than General Electric right now; if you want to invest in GE, don't do it with money you aren't prepared to lose.
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John Bromels owns shares of General Electric. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.