A disappointing earnings report that included a massive cut in the dividend, a $22 billion charge and the disclosure that the Department of Justice is investigating the company’s accounting practices has cast doubt on attempts at a turnaround at the iconic American conglomerate General Electric (GE - Free Report) .
Earlier in October, investors cheered the appointment of outsider Larry Culp as CEO, sending shares rallying in what looked at the time like it might be the end of a years-long slide that also saw GE removed from the Dow Jones Industrial Average for the first time in the 133-year history of that index.
The rally was short-lived however, and GE shares sold off hard on Tuesday after the report, losing more than 10% on the session and now hovering just above the $10/share level.
GE cut the dividend to just $0.01/quarter, down from $0.12. The move to a penny – literally the lowest a dividend company can pay - seems like a symbolic attempt to avoid eliminating the dividend altogether. GE has paid a dividend continuously for 119 years. In better times, the yield on GE shares was widely viewed as a safe and predictable source of income for retirees and conservative income investors.
The company expects the move to preserve approximately $3.9B in cash per year.
Revenues and net earnings for Q3 were both lower than analyst estimates, coming in at $29.57B and $0.14/share, respectively - versus Zacks Consensus estimates of $29.88B and $0.21/share.
GE also announced that it would take a $22B charge to goodwill related to underperforming acquisitions in its Power unit. The company appears to have made serious miscalculations about the rate of adoption of renewable energy sources in the market and had bet heavily in the past few years on older fossil fuel technology. The errors led to lagging sales and rising inventory level in the unit.
GE is cooperating with the SEC and DOJ in their investigation into the charge.
GE Power will now be split into two divisions, and the company will continue moving forward with its plans to spin-off its Healthcare businesses and sell its stake in oil and gas company Baker-Hughes.
Recent downward earning estimate revisions earn GE at a Zacks Rank #4 (Sell) and it’s certainly conceivable that the reaction to developments in this report could take that ranking even lower.
On the investor conference call, new CEO Culp – who officially took over on October 1st - was left with the unenviable task of explaining a poor quarter that happened before he took the helm.
Culp acknowledged that “this is not a quarter we are particularly proud of,” but added “we are on the right path to create a more focused portfolio and strengthen our balance sheet.” He also stated that although GE was facing cash constraints – hence the dividend cut – he did not have any plans to raise cash by selling equity.
Culp has an extremely difficult job ahead of him and he seems willing to “rip off the band-aid quickly” by taking temporarily painful steps to put the company on firm financial footing. For investors however, it might be too little, too late as one of the remaining compelling reasons to own the stock – a 4.25% dividend yield – evaporates.
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