General Electric sliced its dividend in half Monday, saving the beleaguered industrial giant $4.2 billion annually as it seeks to regain its footing after more than a decade of lagging profits and poor stock performance.
Shareholders will see their payments on each share drop from 24 cents a quarter to 12 cents, just the third time the company has cut the payout in its 125-year history. The reduction comes as the manufacturing conglomerate put in motion a sweeping overhaul that includes plans to revamp its board of directors and sell off business units, including its storied lighting business that dates back to its founder, inventor Thomas Edison.
GE has long been one of Wall Street’s biggest dividend payers, behind the likes of Exxon and Apple. Everyone from individual investors to pensions to foundations have relied for decades on the GE dividend.
“This is about as bad as we had expected, following third-quarter results that were undoubtedly worse than most could have imagined six months ago,” said JP Morgan analyst Stephen Tusa in a note. Tusa has projected that the price of GE shares could fall to $17; they are currently priced at nearly $19 a share.
General Electric chief executive John Flannery said the decision was made to bolster the company’s cash holdings. GE’s estimated $7 billion in cash flow this year could not by itself cover the $8.4 billion dividend payout.
“We understand the importance of this decision to our shareowners and we have not made it lightly,” Flannery said in a statement.
Flannery made the announcement Monday at a highly anticipated investment analyst day in New York, where he also unveiled a reorganization plan to get the former earnings powerhouse back on track.
He said the company would build its future around its aviation, health care and power segments. It will jettison most everything else. Those other parts include a locomotive business, a large investment in oil exploration company Baker Hughes and GE’s lightbulb business.
General Electric, the only company remaining on the Dow Jones index from the original list, said Monday it will revamp its board of directors, one of the most prestigious panels in American business. It is reducing the number of seats from 18 to an even dozen, and three members will be replaced. The board, which has been criticized for allowing GE’s value to plummet, includes activist investor Trian Fund Management, which recently won a seat on the board.
The manufacturing conglomerate had long been a pillar of American industry. It has 295,000 employees, competes in 180 countries and enjoyed wide respect for its management and its corporate governance. But the firm stumbled under the reign of chief executive Jeffrey R. Immelt, who retired earlier this year after 16 years in the top spot. Immelt had succeeded Jack Welch, a legend in corporate management circles.
Flannery has been working to restore confidence. After his appointment in August, several top managers left the company, including the chief financial officer. Flannery subsequently grounded the company’s corporate jet fleet, reduced the number of cars issued to executives and announced a review of its compensation policies. Still, the company reported disappointing financial results for the third quarter
GE shares were trading around $18.83 in midday trading Monday, a decline of more than 8 percent on the day. GE began the year trading above $30, and shares were $25 as recently as a month ago.
The new dividend yield will be around 2.3 percent, depending on the stock’s price.
“That yield had really grown over the last decade,” said Jeff Windau, an analyst with Edward Jones. “There was a large group that owned [the stock] for the dividend. That rationale is more muted now. The 50 percent cut puts them in line with what the other industrials are paying..”
Windau, who rates the company’s stock a buy, said GE’s decision to build around core segments such as jet engines and health care should show real growth potential over the next three to five years.
So does Melius Research, but the analyst team there considers the current stock price “unfathomable post the financial crisis,” analyst Scott Davis said in a recent note.
“How we got here is still open to debate . . . I’m not sure we totally know yet or that it matters at this point. What we do know is that GE is a company in disarray, crisis, with massive brand destruction, and shareholders are voting with their feet — running away as fast as they can.”
Davis does see optimism, however. With the price under $20, he rates GE a buy with plenty of upside, including a price target of $35.
“We may still have a rocky next few months ahead of us but we find a highly compelling risk-return here.”