What happened
2017 was a painful year for investors in General Electric (GE 1.30%) as they watched shares of the industrial stalwart crumble. The last quarter of the year was particularly difficult when GE stock lost nearly 28% in value, ending 2017 down a whopping 44.8%. Dismal numbers, top management churn, a dividend cut, a major portfolio restructuring in the works -- GE's 2017 story was a mix of highs and lows.
So what
GE's chronic underperformance wasn't news anymore, but investors' patience started wearing out when the company reported lower profits and a muted guidance for fiscal 2017 earlier last year. By mid-year, several analysts had turned bearish on GE amid declining profits and cash flows. In August, John Flannery replaced the hated former CEO Jeff Immelt; but investors who thought the news would give the falling stock a much-needed break were in for a bigger shock.
The threat of a dividend cut loomed large, and the market's worst fears were confirmed when Flannery slashed GE's earnings guidance and cut dividends by a whopping 50%, nearly halving the stock's dividend yield from 4.7% to 2.4%. Stunned investors pinned hopes on the company's crucial investor update in mid-November for clarity on its next future plans. Unfortunately, management failed to pacify investors and GE stock collapsed further.
Image source: Getty Images.
In the November investor update, Flannery revealed that he is planning to divest assets worth nearly $20 billion in the next couple of years to focus on its core industrials business. Transportation, industrial solutions, and lighting were just some of the businesses that GE plans to put on the chopping block. That aside, management also mentioned an "exit optionality" on Baker Hughes (BKR 1.93%) -- the world's largest oilfield services company, of which 62.5% is owned by GE.
The event left a lot of unanswered questions. Is divesting high-margin and high-cash-flow businesses such as lighting and transportation a good idea at a time when GE is rapidly burning cash? What did management mean by "exit optionality" on Baker Hughes, and why the need to review a merger closed just months ago? What other businesses could GE sell? How will it grow its core business? Can GE sustain its reduced dividend, given that it intends to borrow to fund its pension liabilities?
Lack of visibility in GE's turnaround plans left investors disappointed, which showed up in the stock's fall.
Now what
Flannery has an uphill task at hand to turn GE around and win investor confidence. It won't be easy, and it won't happen overnight. Let me also tell you that 2018 will likely be a year of low profitability for the company as it focuses on fixing itself. Yet, investors can at least remain hopeful of better days ahead as restructuring goes under way even as GE cashes in on its strong segments like aviation and healthcare. As a patient investor, I'd still consider GE a promising long-term story.
