General Electric (NYSE:GE) and its investors have been suffering for the last few years. This August, former CEO Jeff Immelt was replaced with John Flannery, who almost immediately shook up some of the most established tenets of the company's strategy.
In this Industry Focus segment, Motley Fool energy analysts talk about some of the changes that Flannery is making, what investors will want to watch out for in the next year, and how these changes could turn out to be a fantastic long-term change for GE.
A full transcript follows the video.
This video was recorded on Dec. 21, 2017.
Sarah Priestley: The next headline, we kind of touched on this already, it's something I definitely have a vested interest in, is GE. GE is one of the country's biggest employers, one of the country's most widely held stocks. Its power division supplies over 30% of the world's energy. So this is not small change that we're talking about with this company.
Taylor Muckerman: I'd say it's too big to fail, in that category.
Priestley: So in August this year, Immelt, the previous CEO, was replaced by John Flannery, the incoming CEO. The company has been in an awful cash crunch. It's really just incredibly irresponsible, I feel like that they have got to the situation they're in. Flannery is making moves. He cut its dividend to save about $4 billion a year. It's gone from about a 4.7% yield to a 2.4% yield. They're cutting businesses, transport division, light bulb business, potentially coming out of their Baker Hughes (NYSE:BHGE) merger, relinquishing stake there. That was a Baker Hughes GE company. So overall, just a plan to simplify GE and refocus on the core areas: aviation, healthcare, and power.
This quote from John Flannery I really like. He said, "I'm not trying to run the company for the reaction on Monday or Tuesday or Wednesday of this week. We have a long-term plan. We have a lot of work to do. We're reinventing ourselves many, many, many times." So I feel this is kind of a very Foolish story, potentially, because it's such a long-term vision. People are talking five to 10 years. It's a huge ship to try and turn around. It's not going to happen overnight. What do you make of this story?
Muckerman: I foresee some dividends and share buybacks in the future, once they start to parse out some of these other business lines. You mentioned Baker Hughes and that tie-up. That basically took the place of Halliburton's attempt to tie up with Baker Hughes. I think they have to wait a little bit longer than the other divisions. All the other divisions they announced they want to sell, they can move forward with that whenever. But I think based on the regulation and the deal terms, they have to wait a little while in order to parse off the Baker Hughes portion of their business. But that's certainly on the chopping block almost as soon as it was announced that it went through, just a few months later. Very interesting there, reducing the exposure to natural gas and oil, even though they are the largest natural gas turbine manufacturer for power purposes in the United States and the world. I'm also a shareholder of GE. I assume that's what you meant when you said you have a vested interest.
Muckerman: I'm holding, and I have hopes and belief that they're going to turn it around. Might even, who knows, write some puts or buy some more. But yeah, certainly going to have to do something with that cash, and I think dividends and share buybacks will be a part of that. The share is down over 30% year to date. Share buybacks might not be the worst plan with the extra cash.
Priestley: Yeah, absolutely. I bought more and lowered my price point, too, so I'm absolutely invested in this story. I think Flannery has exactly the right idea. He's making very difficult decisions. It's hard to go in and say, "We're now expecting to earn -- " I think they were expecting to earn $1.00-1.07 per share. That's half the goal they had a year ago. But one of the biggest criticisms, and one of the most egregious things that I think you can talk about from the Immelt era, is just the way they approached their financials was very opaque, and they weren't very good at giving guidance at all.
Muckerman: Sure. It's tough, for a business that big.
Priestley: It is, it's true. But I feel like there was definitely some number fudging going on. The way that they worked out cash flow was just so different from any other company. Very difficult to make comparisons.
Sarah Priestley owns shares of General Electric. Taylor Muckerman owns shares of General Electric and Halliburton. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.