GE to shrink, investors worry it will be less profitable

The industrial conglomerate will focus on aviation, power and healthcare, and it's also cutting its dividend in half.
General Electric Chief Executive Officer John Flannery presents the company's new strategy and financial targets to investors at a meeting in New York, US on Nov 13, 2017.
General Electric Chief Executive Officer John Flannery presents the company's new strategy and financial targets to investors at a meeting in New York, US on Nov 13, 2017. PHOTO: REUTERS

(REUTERS) – General Electric Co will radically shrink to focus on aviation, power and healthcare, betting on sectors where it thinks it can make a profit, as the most famous US conglomerate tries to end a decade and a half of share price stagnation. 

The 125-year-old company cut its dividend and profit outlook in half as it begins the transition, in a plan unveiled by new Chief Executive John Flannery.

It will also shed 25 per cent of its corporate staff, meaning 1,500 job losses at its Boston headquarters. 

GE shares fell 6 per cent to US$19.22 (S$26.18), its lowest in more than five years, valuing the entire company at about US$168 billion, as investors worried that plans for a years-long transformation did not show how the slimmed-down company would generate cash to justify its stock valuation. 

“By the numbers, we see a core operating performance that is below plan, and, currently, a consensus expectations curve that we think remains too high,” said JPMorgan analyst Stephen Tusa. 

GE is the worst-performing Dow component this year, down 35 per cent through Friday’s close. GE stock has effectively been dead money since September 2001, when recently retired Chief Executive Jeff Immelt took over, posting a negative total return even after reinvesting its juicy dividends. 

Flannery, who took over as CEO on Aug 1, said he was“looking for the soul of the company again” and would focus on “restoring the oxygen of cash and earnings to the company.”

The transition likely means the sale of US$20 billion of assets. GE will jettison businesses with “a very dispassionate eye,” Flannery said, keeping only units that offer growth, a leading market position and a large installed base. 

That could mean exiting businesses like lighting, transportation and oil and gas, closing factories around the globe, analysts said. 

Flannery offered no quick fixes for investors. He said power, one of the businesses GE would focus on, was “challenged,” but could be turned around in one to two years. 

He said the troubled GE Digital unit, on which Immelt bet billions of dollars, needed a more focused strategy based on selling apps to customers in its core businesses of power, aviation and healthcare. He said GE would cut spending on the unit by US$400 million in 2018, down from US$2.1 billion in 2017. 

Flannery added that some of its healthcare IT business, such as software for imaging and hospital staff scheduling, were still critical to the company and not likely to be divested. 

DIVIDEND CUT

The dividend cut, only the third in the company’s 125-year history and the first not in a broader financial crisis, is expected to save about US$4 billion in cash annually. 

“This dividend cut will be a major disappointment to GE’s (roughly 40 per cent) retail shareholder base,” said RBC Capital Markets analyst Deane Dray. 

The cut will save GE US$4.16 billion in payouts, the eighth biggest dividend cut in history among S&P 500 companies, according to Howard Silverblatt, senior index analyst of S&P Dow Jones Indices.

GE also had the biggest cut when it slashed its dividend by US$8.87 billion in 2009, Silverblatt said.  GE forecast adjusted 2018 industrial free cash flow of $6 billion to US$7 billion, up from an estimated US$3 billion in 2017. 

The move to make GE smaller and nimbler is a turnaround from the previous multi-business approach taken by former CEOs Jack Welch and Jeff Immelt. 

Flannery’s changes repudiate much of Immelt’s vision of a “digital industrial” company that builds software to manage and optimize GE’s jet engines, power plants, locomotives and other products. 

OUT OF FAVOUR

Conglomerates have long been out of favour on Wall Street, where investors prefer to bet on specific industries rather than a mixed portfolio. 

GE forecast 2018 adjusted earnings per share of US$1 to US$1.07 per share, compared with its earlier estimate of US$2 per share. Wall Street was expecting US$1.16, according to Thomson Reuters I/B/E/S. 

The company on Monday cut its quarterly dividend to 12 cents per share, from 24 cents, starting in December. 

GE’s dividend cut – a bid to save cash when the company’s cash flow is deteriorating – is the third in its history. The other two cuts came during the Great Depression and the global financial crisis of 2007 to 2009. 

Flannery’s strategy is a turning point for the company, which over several decades built itself into a sprawling conglomerate with interests across media, energy, banking, aviation, railroads, marine engines and chemicals. 

GE executives have said that analysts have undervalued the company’s digital business. They argue the digital units should be valued more like Amazon.com Inc, Alphabet Inc’s Google and other fast-growing tech companies.  GE will also cut its board to 12 from 18 members.