Please ensure Javascript is enabled for purposes of website accessibility

GE's Near-Term Prognosis Goes From Bad to Worse

By Motley Fool Staff - Oct 24, 2017 at 8:50PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

General Electric’s profits missed Wall Street’s estimates by an astounding 40%.

In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross consider General Electric's (GE -2.01%) horrid quarterly report, and the market's relatively tolerant response to it, with newish CEO John Flannery already in the process of plotting out an episode of Extreme Makeover: Conglomerate Edition for his company.

Asset sales are on the horizon, as are cultural changes, and the markets are looking toward the future. But for now, what investors will really be watching is how untouchable the dividend turns out to be.

A full transcript follows the video.

This video was recorded on Oct. 20, 2017.

Chris Hill: General Electric. GE's third-quarter profits came in 40% lower than Wall Street was expecting. New CEO John Flannery submitted his entry for understatement of the year when he called it, quote, "a very challenging quarter." Ron, interesting to see the stock, because this is a stock that typically does not move all that much, and right at the open it was down 8%, but it did recover Friday morning.

Ron Gross: Right. Because I think it's a bet on the future, because the past is over. And Flannery is in there and he's being pretty serious about this. Everything is up for review. Everything is up for examination. Every stone turned, he says, no sacred cows. I think that's important, because it's been mismanaged for years. I think what you're going to see, probably, is to look to see what doesn't fit, and then you'll start to see some dispositions, some selling of things. And what's important to keep an eye on is the dividend. Is that in danger? Because if it is, and it probably is, a lot of people will be very upset.

Hill: Wait a second. Before I go to Jason, how much danger is it in? For whatever GE's stock has done over the past decade or two, the dividend was something you could always count on.

Gross: You're seeing little changes in attitude, saying "the dividend is sacred," and well, then, "maybe we should take a look," and then, "we're going to do what's appropriate, and now it's on the table and it's under review." And so, I think slowly, slowly, slowly, they're leaning toward having to make a change. Because there's a lot of liabilities to this business. The pension liability, a lot of people don't think about, is humongous here. So to fund the pensions, the capex, the capital expenditures, and the dividend, based on current cash flow, you can't do that. The payout ratio does not support that dividend.

Jason Moser: He's walking around with this sort of mantra -- if it doesn't fit, like Ron said, get rid of it. I like that, though. I think Flannery is GE's Alan Mulally. And I think in the near term, it's easy to be critical, concerned, perhaps. But I think, longer term, when you look at this company five, 10 years down the road, he's shoring this company up.

It's not like they're going to cut the dividend completely, I don't think. If they have to cut the dividend somewhat, I think at least it's something you have to consider. We've seen companies before in times of trouble, they'll pull back on that dividend to make sure they have the business, the balance sheet shored up.

Like Ron mentions there, those pension liabilities, that is a real challenge that they will have to address. Not 10 years from now. They have to address that right now.

But I really do feel like patient shareholders right now with GE will be rewarded if they can see through this trying time. I think Flannery's intentions are good. He seems to have a good plan.

Matt Argersinger: I think cut the dividend to zero.

Hill: Whoa, zero?

Argersinger: I think you throw in the kitchen sink.

Gross: Send your email to ...

Argersinger: Look, if you're the new CEO, you're trying to dramatically change the culture, change the capital allocation strategy, change the future for GE, which has been on a wrong track for nearly two decades now. Isn't this the time to just throw it all out the window?

Gross: You'll make a lot of enemies doing that.

Argersinger: You probably will, but you know what? The stock price will go down for sure, but this sets the stage for a new GE, one that's cleaner, that they can invest in the right places, doesn't have these legacy costs, legacy obligations on the balance sheet. I think it's the right way to go.

Gross: They're going to be able to cut billions of expenses. And they're going to shed $20 billion or so, they say, of struggling businesses. So now, we turn to, it's really been a capital allocation problem. Immelt did a terrible job of buying and selling businesses at the wrong time. As we said, the liabilities are too high, the dividend is too high. If Flannery can bring capital allocation discipline to this company, you might have a good investment.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
GE
$62.39 (-2.01%) $-1.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.