Is General Electric a Buy with its New CEO? (GE)
By: Ned Piplovic,
On Monday, October 1, 2018, the General Electric Company (NYSE:GE) announced the appointment of H. Lawrence Culp, Jr. — a current member of the company’s Board of Directors — as Chairman and CEO to replace outgoing CEO John Flannery. With the company’s share price at a nine-year low, does the management change alter the forward outlook on the company and does the low share price make GE a buying opportunity?
The company’s current dividend yield of 4% outperforms the average yields of GE’s industry peers by a significant margin. Additionally, after cutting its annual dividendpayout by two-thirds over two years in the aftermath of the 2008 financial crisis, General Electric has hiked its annual dividend payout in six out the seven intervening years. Over that period, the annual payout amount advanced 130%, which corresponds to an average growth rate of more than 12% per year.
However, gauging the potential future outlook of General Electric solely on the merits of its recent annual dividend growth and its current dividend yield is misleading. Even with the recent growth, the current above-average yield is purely a function of the declining share price. If we used the share price from 12 months earlier for the calculation, the yield would be at 1.9%. Additionally, the company’s current dividend payout ratio is more than 90%, which means that General Electric is using almost all of its earnings to cover the dividend payments, which is not sustainable. Furthermore, the company’s current debt to equity ratio is nearly 200%. Even GE management has indicated a need to “normalize dividends” going forward, which means further dividend cuts and most likely an outright suspension of dividend payouts, at least temporarily while the company is restructuring.
The company will distribute its next dividend on the company’s October 25, 2018, pay date to all its shareholders of record prior to its most recent ex-dividend date on September 14, 2018.
General Electric Company (NYSE:GE)
Headquartered in Boston, Massachusetts, and founded in 1892, the General Electric Company operates as a conglomerate that provides various products and services. The Power segment offers technologies, solutions, and services related to energy production. Additionally, the Renewable Energy segment provides hardware, software and support services for the wind and hydropower energy production industry. The Oil & Gas segment offers oilfield services, equipment, machinery and process solutions. Next, the Aviation segment manufactures aviation engines and replacement parts, as well as provides maintenance and repair services. General Electric also offers various diagnostic imaging, clinical systems and other medical services through its Healthcare segment. The company’s Transportation segment manufactures locomotives and offers rail support services, as well as other equipment and services for mining and marine power diesel engines. Furthermore, the company’s Lighting segment offers light emitting diode (LED) products, as well as energy efficiency and productivity solutions. Lastly, the Capital segment provides industrial and energy financial services, commercial aircraft leasing, financing and consulting services.
The company cut its dividend payout in half for 2018 from a $0.24 quarterly payout amount to the current $0.12 distribution. This current quarterly amount converts to a $0.48 annual dividend and yields 4%, which is 7.3% above the company’s own 3.7% five-year average yield. During the seven-year growth streak between 2011 and 2017, General Electric more than doubled its total annual payout and grew its annual dividend at an average annual rate of 12.5%. Additionally, the company’s current 4% yield outperforms by almost 140% the 1.66% average yield of the General Conglomerates industry segment and by more than 50% the 2.58% average yield of the segment’s dividend-paying companies.
Generally, that kind of dividend performance would be a positive sign for dividend-seeking investors. However, the share price and other financial indicators suggest the opposite. The share price started the trailing 12-month from its 52-week high of $24.80 on October 3, 2017, and declined more than 50% before bottoming out at $11.29 on September 28, 2018. The new CEO announcement on Monday morning caused the share price to jump more than 14% at the open, but the stock lost more than half of that spike by the end of trading and continued to decline after the markets opened for trading on Tuesday morning.
Even with several dividend hikes, General Electric delivered a total loss of more than 35% over the past five years. The more recent performance was even worse with a 44% total loss over the past three years and 51% over the past 12 months.
While General Electric could come out of its reorganization as a leaner and stronger company poised for long term growth, investors might consider other opportunities in the interim and hold off acting until GE provides better indicators that it has its house in order.
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Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.