Why GE’s Stock Has Underperformed in 2017

General Electric‘s (NYSE: GE) stock has declined nearly 10% since the start of the year, significantly underperforming compared to the broader market. Goldman Sachs also downgraded GE recently, stating that the company may be forced to cut dividends this year. There are a few major factors that have contributed to GE’s underperformance this year. First, GE has reduced its dividends in the last 12 months, which may have impacted investor confidence. Secondly, GE’s industrial free cash flow was negative – and worse than expected – in Q1, though much of that was due to fluctuations in GE Aviation receivables, which will likely be offset in the next few quarters. Third, lower crude oil prices continue to put pressure on GE’s margins. Below we discuss these factors further.

Lower Dividends

GE has underperformed the market over the past several years, but in recent months the company has been facing heat from investors over dividends and lower profits. The reduction in dividends is a result of pressure on GE’s profits due to continued weakness in the oil & gas industry, among other factors. However, its dividend yield in the last few years has been consistent with its pre-recession levels, as GE repurchased about $22 billion worth of stock in 2016. 

GE’s High Capital Spending Justified?

GE’s capital spending was very high in the last few years, which is also a matter of concern for some investors as the short-term returns are not particularly high. GE’s total industrial capital spending rose by nearly 90% in 2015, primarily due to the acquisition of Alstom’s Energy business and investments in GE Digital.

GE also recently sold some of its saturated business to invest in more profitable and high growth businesses. This has led to increased capital spending in the last couple of years. However, GE had about $41 billion in cash at the end of the first quarter, which can be utilized for capital spending and dividend payouts. Additionally, the cash outflow from discontinued operations of GE Capital will not linger going forward, and thus should not be a concern for investors. After the 2008 economic crisis, GE Capital’s performance was somewhat of a drag, and it was further affected negatively by Europe’s debt crisis. Thus, GE decided to sell most of its Capital assets and invest in more high growth, strategic businesses.

Sluggish Oil Prices Caused More Harm To GE Than Others

GE’s oil & gas revenues continued to decline in the first quarter of 2017 despite OPEC’s decision to cap their supply. Crude oil prices have remained around $50 per barrel this year, but that is still not high enough for GE’s margins to improve. Also, GE has invested heavily in some oil-dependent economies, and the slowdown in the economic growth in markets such as China has also impacted GE’s growth in recent years. GE now is looking to reduce its costs through acquisitions, and the GE-Baker Hughes deal is an example of that. However, we believe that oil prices will remain around their current levels in 2017, and thus we do not expect much of a revival for GE’s oil business in the near term.

For our model and valuation, please refer to our complete analysis of General Electric

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