It wasn't supposed to be this way.
At the end of 2017, things were actually looking up -- at least a little -- for industrial stalwart General Electric (NYSE: GE). Former CEO Jeff Immelt, despised by many in the investing community who blamed him for GE stock's poor performance, was finally out, replaced by former president and CEO of GE Healthcare John Flannery. A long-dreaded (and, frankly, necessary) 50% dividend cut was in the rearview mirror. The stock's sharp slide had leveled off a bit, leaving GE shares trading in the high teens, with some analysts counseling that the stock might be oversold.
But that hope was short-lived. Just two weeks into the new year, Flannery announced a previously unforeseen $6.2 billion insurance charge, and the whirlwind of horrors that was GE's 2018 began. Here's what's happened so far (there's still time for more bad news before the ball drops in Times Square), what GE has done to try to turn things around, and what it means for investors.
Off on the wrong foot
GE's problems didn't begin in 2018, of course. Some of them can be traced all the way back to 2008, when the financial crisis decimated GE Capital, the company's financial services and consumer credit arm. Then, in 2014, the oil price slump hit GE's oil and gas division hard. In 2017, with oil prices finally poised to rise again, weakness in end markets for gas turbines -- the main product of GE's power unit -- caused the company to lower guidance and cut its dividend.
That's where 2018 began. And, right off the bat, it was clear there would be more problems for the company. The $6.2 billion charge announced in January was thanks to some of GE Capital's legacy reinsurance liabilities. And, unfortunately, it wasn't the end: GE Capital will need to allocate $15 billion over the next seven years to fund these liabilities, effectively ending GE Capital's ability to help fund GE's dividend payments to shareholders.
Then there was the announcement that the company was under investigation by the SEC over the insurance charge and its revenue recognition processes, and would be restating two years of financial results. GE also announced lower revenue and a net loss for Q4 2017. And it wasn't even February yet.
From bad to worse
As the year progressed, additional concerns began to mount about GE's massive debt load, which currently stands at about $134.6 billion, more than twice its current market cap. Weakness in the power unit continued to drag on earnings in Q1 and Q2, and the company's stock continued to slide.
GE shares were down 10% for the year by mid-February and 20% by late March. The share price had fallen so far that General Electric's stock was no longer meaningfully contributing to the Dow Jones Industrial Average. Adding insult to injury, the DJIA ejected GE on June 26, replacing it with Walgreens Boots Alliance.
Currently, GE's stock is trading at about $7.30 per share, down more than 58% for the year. That's its worst annual performance in more than half a century.
Trying to right the ship
Of course, GE's management hasn't been just sitting idly by while this maelstrom of bad news swirls around it. In April, GE initiated a board shakeup, cutting the board from 18 members to 12. Three of these 12 were new to the company: former Danaher CEO Larry Culp, former American Airlines CEO Thomas Horton, and former chair of the Financial Accounting Standards Board Leslie Seidman, who was expected to bring oversight to GE's troubled financials.
This move knocked out a number of members who had supported Flannery's election as CEO, and may have paved the way for the board to remove him just six months later. But while he was still at the helm, Flannery made some big moves to try to right GE's ship, most notably following through on his plan -- announced in 2017 -- to sell $20 billion in assets, which would help to clean up the company's debt-ridden balance sheet. That included the May announcement that GE would merge its transportation business with Westinghouse Air Brake Technologies (Wabtec) in an $11.1 billion deal, and the June announcements of the sale of GE's 62.5% stake in Baker Hughes, a GE Company, and the spinoff of GE Healthcare -- along with a healthy amount of GE's debt -- into a separate company. Flannery also pledged not to cut the dividend again until after the GE Healthcare spinoff was completed.
Perhaps it was that pledge that rankled the board enough to cut him loose, or maybe they were just hoping for faster progress in achieving these objectives. In any case, in October, the board abruptly announced that it had unanimously voted to replace Flannery, after just over a year on the job. Culp, who had joined the board in April, was named CEO. Among his first acts was to further slash the company's quarterly per-share dividend from $0.12 down to just a penny -- another blow for investors.
According to Culp, Flannery's turnaround plan is still in place. However, since ascending to the C-suite, Culp has been quiet about any additional plans he may have. Besides cutting the dividend, he hasn't made any immediate moves beyond announcing a split of the company's power division into two separate units, both of which report directly to him. Of course, he's been CEO for less than three months, while GE's stock price slide has been going on for nearly two years.
The sweet hereafter
A lot has changed for GE since this time last year, but its underlying problems haven't gone anywhere. The company is still comprised of a very strong aviation division and a strong healthcare division, shackled to several weak, small, low-margin, and/or struggling businesses, a complex corporate structure, and a mountain of debt.
That it's taken the company much of 2018 to figure out how to effectively proceed is a testament to how difficult its situation is. And even after the massive hit the stock has taken this year, it's not clear if GE has hit bottom.
Flannery's plan to essentially break up much of the company -- leaving aviation and power as the sole remaining industrial businesses -- may be the best way forward. Or Culp may have other ideas, but if he does, he hasn't shared them. Indeed, he hasn't said much of anything, playing the "I'm just the new guy" card on several occasions, including during the most recent earnings call.
One thing's for sure: It's going to take a lot of time to sort out GE's problems and get the company back on a path to sustained growth (if it ever happens). GE investors should be prepared for a long, tough 2019...and beyond.
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