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Does General Electric's Ugly Earnings Report Have a Silver Lining?

By Motley Fool Staff – Nov 1, 2018 at 11:11AM

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Third-quarter profits and revenue missed expectations, and the company slashed its dividend to the bone.

Aging conglomerate General Electric (GE 0.15%) has been working hard to pivot toward its next act, but the third quarter was not one in which its efforts showed the hoped-for results. The forecasts weren't very optimistic to start with, and the company still didn't meet them. Worse yet, it cut its dividend payout from $0.12 per share to $0.01. That has to sting.

But as MarketFoolery host Chris Hill and senior analyst Taylor Muckerman discuss in this segment of the podcast, GE has some pressing matters to take care of, and the $4 billion it will save thanks to that dividend cut will go directly towards addressing them. The duo talk about its probable strategies, its power division difficulties, and more.

A full transcript follows the video.

This video was recorded on Oct. 30, 2018.

Chris Hill: General Electric's third quarter profits and revenue came in lower than expected, and let's face it, the expectations were not that high to begin with. You tell me, what's the headline here? Is it that? Or is it the fact that the quarterly dividend has been cut from $0.12 a share to $0.01 per share?

Taylor Muckerman: Yeah, that stings a little bit. They say it's going to save them about $3.9 billion. So, as a shareholder, I think that's a good thing. The dividend yield hasn't been enough to keep up with the share price decline. Even though you were getting that few percent over a year, you're still down 50% depending on when you invested in this company. I think to move forward, they're going to need that $4 billion. They have to handle the insurance claims on their GE Capital, which could be up to $15 billion. The Power business, which is their largest, still down 33% in sales in the quarter, and turned into an operating loss. This business is definitely still struggling. They could use that $4 billion. I think that they could hopefully put it to better use.

They're going to have a full investor update early 2019, similar to what Flannery did. The new CEO, Culp, he's going to come out and lay out his plan. So far, it seems like they're still going to continue selling off the Transportation business, spinning off the Healthcare, and paring down their two-thirds ownership of Baker Hughes. Maybe that changes early 2019, when they announce their plans moving forward under the new leadership. But, yeah, I don't think the dividend cut is a negative thing. I think it had to happen.

Hill: It's absolutely the right move. Larry Culp has been CEO for about an hour and a half, I'm sure he and his team are fully aware of the fact that there's a whole swath of investors, institutional and individual, who look to dividend-paying stocks, and when those stocks stop paying dividends or significantly cut their dividends, they're going to jump ship. Larry Culp isn't waiting until 2019 to at least share some of his plans. Part of his plans was taking the Power division and splitting it into two separate units. One is going to be gas products and services. The other is going to be nuclear power conversion, grid solutions. I don't know anything about that business, but I have to imagine that if nothing else, this is going to provide greater insight into those divisions.

Muckerman: Yeah, to see how they're doing, and also hopefully some greater focus within the divisions for the employees themselves and management. I do think it makes sense to split them. Natural gas turbines and steam and nuclear are two vastly different businesses. No real reason why they need to be combined, other than they're power-generating. Natural gas, kind of struggling. Seems to be a lot of supply out there vs. the demand for these natural gas turbines. They did have a little hiccup with Exelon and one of their nuclear turbines that had some faulty equipment, so they had to go out there and shut that plant down. That's a bad look for them in a sector that's quite dangerous, with nuclear power, when you're talking about a malfunctioning unit there. They get that turned around. But, down 33% in your biggest division, that hurts, especially as long as they've been around.

Hill: One other thing that caught my attention, before we move on to the big oil stocks, Larry Culp kind of drew a line in the sand, talking about, "We're not raising money. We have no plans to do any sort of capital raise." I really hope they don't have to, because they don't appear to have a lot of other financial levers they can pull. They've already cut the dividend down to $0.01. It's not like they have a lot of other options.

Muckerman: Yeah, we'll see if that $4 billion can carry them. If they have to go hit the debt markets ... and, issuing equity when your share price is down this far, not a good look, either. Hate to see him have to rebuff on his word this early in the game.

Chris Hill has no position in any of the stocks mentioned. Taylor Muckerman owns shares of General Electric. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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