It would be easy to say that the best days of what was once one of the largest and most revered American corporations, General Electric (NYSE:GE), are behind it. After an abysmal last decade versus the S&P 500, it would be hard to argue otherwise.

More important than reminiscing about what GE once was is the question of where GE is going. The company's cathartic 2018 included the near-eradication of its dividend from $0.24 per share per quarter in 2017 down to just $0.01 per share per quarter, a new CEO, and its removal from the Dow Jones Industrial Average, snapping a 100-year tenure. 

That's about as rock-bottom as you can get. Now, in 2020, it's time to determine if GE has had its wakeup call, or if there's more pain ahead.

A General Electric GEnx-1B jet engine attached to an airplane wing

Image source: Getty Images.

Disappearing dividend

Dividend cuts can be a good thing for companies who simply can't afford to pay them. Between massive pension obligations and a slew of companies falling under and being sold by the GE conglomerate (think Baker Hughes), GE's dividend obligation was its own worst enemy.

Even after the dividend cut, GE isn't profitable. It hasn't been consistently profitable since before 2015. Its free cash flow (FCF) only recently became positive and high enough to cover its dividend, but it's still lower than where it was in the 1990s and more than 10 times lower than some of its best years in the 2000s.

GE Free Cash Flow (Annual) Chart

GE Free Cash Flow (Annual) data by YCharts.

Income investors shouldn't expect GE to significantly raise its dividend in the short-term. In fact, a major increase to GE's dividend in the next couple of years could be an attempt at appeasing shareholders that could do more harm than good over the long-term. However, a rising dividend after GE solves some of its major issues like shoring up pension obligations and moving toward a leaner balance sheet would be a very good sign. It would signal that GE can finally afford to pay a sizable dividend again and would be one of the first meaningful signs that the company has successfully turned it around. This is all to say that an increase in GE's dividend isn't automatically a good thing, it needs to come at the right time and be for the right reasons.

Value?

Naturally, the collapse in the share price of GE has sparked a great deal of conversation about whether or not it's a value stock. It's worth considering GE's value since, despite its flaws, it's still a powerful company. GE's more than 200,000 employees position it as a global leader in industrial manufacturing and technology, most notably in gas and steam turbines for power generation, hardware, software, and platforms for wind turbines in its renewables division, healthcare technologies for hospitals, and jet engines for its aviation division.

GE Chart

GE data by YCharts.

Currently, GE relies on generating positive earnings and FCF from two segments: its ace in the hole (aviation) and its healthcare division. The reliance on two business segments to supply income and cash to fund the rest of GE's turnaround was already a suspect strategy, but now it looks even more fragile considering the current woes of the overall aviation industry in the midst of the global COVID-19 (coronavirus) pandemic.

Segment

2019 Revenue

2019 Margin

2019 FCF 

Aviation

$32.9 billion

20.7%

$4.4 billion

Power

$18.6 billion

2.1%

$(1.5 billion)

Renewable energy

$15.3 billion

(4.3%)

$(1.0 billion)

Healthcare

$19.9 billion

19.5%

$2.5 billion

Data source: GE, 2020 Investor Outlook. 

This year, GE was hoping to trim down and operationally improve its power segment, but renewables are still expected to be FCF negative, even in 2021. GE's strong onshore wind turbine segment and potentially FCF-positive offshore wind turbine segment are a nice pairing to the company's power-generation portfolio, otherwise dominated by steam turbines. Among other things, steam turbines are a critical component in combined-cycle natural gas-fired power plants that supply much of the baseload electricity in the U.S. and around the world. 

The bulk of earnings on major equipment like this comes from aftermarket parts and services, meaning the profit made on the initial sale of the equipment tends to be small. This means that there is hidden value in new unit sales of GE's popular renewable engine turbines and its joint venture LEAP engine which is used in Boeing's 737 MAX in that these products will provide the company with aftermarket revenue for decades after the initial purchase.

The spirit of GE's renewables interest deserves recognition from ESG investors, but the segment's negative margins and foreseeable negative FCF are a troubling burden that's expected to be more than offset by the company's other segments. In short, GE has yet to prove it can feasibly fund and sustain the sheer cost and attention its unprofitable operations need to be successful over the long term. 

Still just a dream

2020 was supposed to be GE's comeback year, but expected industrial FCF of $2 billion to $4 billion and adjusted earnings per share (EPS) of $0.50 to $0.60 now seem highly unlikely. Meanwhile, tons of financial and operational costs will soak up what little earnings the company will generate, likely leading to hardship for the foreseeable future.

No matter how you dice it, buying GE stock at this time is a speculative play on what the company might become five or 10 years down the road, not what it is today.