The litany of bad news for General Electric mounted on Monday as Morgan Stanley and UBS downgraded their ratings for the industrial colossus following a disappointing earnings report last week by the onetime blue chipper.
The share price was down more than 6 percent in trading Monday — its largest drop in six years — as investors anticipated the end of its 4 percent-plus dividend. Pensioners, savers and investors have for decades relied on the success of the GE share price and its clockwork payouts of dividends.
The fall in the share price at the iconic company, co-founded by Thomas Edison, follows several weeks of uncomfortable news, including resignations among GE’s top management ranks, an early departure by former chairman Jeffrey R. Immelt and cutbacks such as scrapping the GE corporate fleet and eliminating company cars for hundreds of executives.
“It’s been brutal, one piece of bad news after another,” said Scott Davis, lead research analyst at Melius Research. “I think the stock is darn close to a bottom. How much worse can it get?”
GE on Friday reported that it earned 29 cents a share from continuing operations in the third quarter, down 9 percent from the same period a year ago and far short of the 49 cents a share expected by analysts.
GE’s new chief executive, John Flannery, called the company’s cash flow “horrible” in a CNBC “Squawk on the Street” interview on Friday. He pledged “a number of new steps we are going to take” in an ambitious corporate restructuring, including aggressive cost cutting, especially at the lagging power generation division.
Flannery said he is reviewing the dividend and is expected to announce something at an investor meeting in New York City next month.
“They missed their cash flow targets so badly,” said Barbara Noverini, an equity analyst at Morningstar. “We are looking at them not being able to cover their $8 billion dividend commitment without dipping into capital needed to support future growth.”
“They’ve done everything wrong,” said Ivan Feinseth, chief investment officer at Tigress Financial Partners. “The key is what’s going on going forward. This new CEO has shown he is different than GE has had in the past. He has the opportunity to turn around one of the world’s most iconic companies. If he’s successful, it could make him one of the world’s greatest CEOs.”
It is a big fall for an industrial conglomerate that was once considered the bluest of blue chips — widely admired by investors, head hunters and business schools as a factory that churned out world-class managers. It does everything from manufacturing locomotives to finding oil.
GE is the only company remaining from the 12 original components of the Dow Jones industrial average in 1896.
But the company lost its momentum under Immelt, who led it in some difficult times. He took over as chief executive from legendary manager Jack Welch just days before the Sept. 11, 2001, terrorist attacks. Immelt also had to navigate the global financial crisis of 2008-09. He undertook a vast overhaul of the conglomerate’s portfolio, including selling off a large portion of its financial arm, GE Capital, and investing in the oil industry.
“After the financial crisis, he started making the right moves,” Noverini said. “You had a bunch of new products beginning to flow through the pipeline, including new jet engines and locomotives.
“Transformation takes time and discipline,” she said. “If anything, there was too much exuberance at the get-go and not enough execution.”
Noverini said the company, with more than $120 billion in annual revenue and nearly 300,000 employees, has several strong core businesses to build upon: aircraft engines, medical imaging and oil and gas equipment.
“Now it’s time for execution,” she said.
In that vein, others share her optimism about the company’s prospects: Bank of America Merrill Lynch on Monday upgraded its rating from neutral to buy, saying that the company’s bad news was cooked into the current share price in the low 20s.
GE has been one of the worst performers in the Dow for years, disappointing investors. But the dividend has been a bright spot despite the poor results and bad news, which included reports last week that a second, empty corporate jet occasionally flew along with Immelt in case of mechanical problems with the first jet.
“As silly as it sounds with two planes, that wasn’t the problem,” Feinseth said. “Long time investors who have suffered in the stock and seen it decline and are about to get their dividend cut, are not happy to hear about the two planes. But that’s not the problem with the company.”