Why We Remain Bullish On GE Despite Dividend Cut

by Trefis Team
General Electric
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General Electric’s (NYSE: GE) stock plunged by nearly 10% after it announced a dividend cut for the first time since 2009, and only the second time since the Great Depression. The move comes as a part of a broader restructuring which also included job cuts and a renewed focus on the Healthcare and Aviation businesses. While a dividend cut is certainly not good news for investors, it was a necessary step given that the company’s dividends were exceeding its free cash flows, which is not a sustainable position to be in. The cut is likely to boost cash flows, while the restructuring should improve profitability and improve the sustainability of GE’s business model. GE promised to be a more focused industrial company at its recently concluded investor presentation, and announced that it will renew its focus on Healthcare and Aviation. The two businesses have done well in the last several years, and still have a lot of growth potential, which could offset the headwinds in GE’s Oil and Power segments.

We have a price estimate of $23 for GE’s stock, which is around 25% ahead of the current market price. This note discusses why are still bullish on the company’s fortunes despite the aforementioned issues.

A Move Towards Sustainability

At the investor update presentation on Monday, November 13, the industrial giant announced a nearly 50% dividend cut for the fourth quarter along with its restructuring plans. GE’s stock plunged by more than 7% on the day of this announcement, the largest percentage decline in a day since 2009. However, as mentioned above, this was the right move. The company is facing severe headwinds from its Power and Oil business due to operational issues and the pricing pressure in the oil industry. Thus, maintaining high dividend payouts would have been an issue at this juncture. The company needs to improve its cash flows significantly in the coming years to regain investor confidence.

The restructuring and leadership changes made by GE in the meeting included a reduction in the number of board members from 18 to 12 and a nearly 25% workforce reduction in GE’s home office. GE is also considering the sale of nearly $20 billion of assets to realign its business towards the more profitable and robust businesses such as Aviation and Healthcare. Overall, we believe that these plans are bitter but necessary pills for GE at the moment.

Renewed Focus On Aviation, Healthcare In Light Of Oil & Gas Headwinds

GE’s Healthcare and Aviation segments have been consistent performers in the last five years generating nearly 50% of GE’s segment EBITDA. GE Aviation has shown robust growth in the last few years driven by strong industry dynamics and the successful launch of GE’s LEAP engine. At the Paris Air Show, GE bagged more than 1700 orders totaling about $31 billion. GE may also win more contracts for military engines by leveraging its analytics expertise.

GE Healthcare is another robust segment which has consistently grown over the last few years. The segment’s cash flow generation is strong, and likely to grow further due to increased demand from emerging markets. GE is committed to investing more in the areas of precision health, smart scanners, and other bio-pharma tools in the coming quarters. GE is also working to build a profitable digital analytics model for this segment. Overall, we expect that these two segment’s will driven the company’s future growth as it looks to offset near-term oil & gas headwinds.

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

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