Another Dividend Cut On The Way For General Electric Shareholders?

GE was the worst performer on the Dow last year, after it lost about half its value. So far this year, it's fallen another 23%. Bulls thought they'd found a bargain when the stock traded near $20 in November, but the downward spiral continued in the months that followed, producing huge losses for bulls.

The company is facing perhaps the biggest crisis of its 125-year history, as demand for GE's key revenue-producing products, such as power plants and locomotives, has weakened, and cash began to dry up. To overcome these challenges, the company’s new CEO, John Flannery, plans to trim the size of this gargantuan conglomerate by selling assets worth $20 billion and cutting operating costs.

The biggest shock for loyal income investors came when, this past November, GE slashed its rock-solid dividend in half. It was only the second time since the Great Depression that GE has cut its dividend. While slicing the payout, Flannery acknowledged that fixing GE will take time and require a great deal of corporate restructuring.

Still, it appears GE’s troubles are far from over. The latest in the long list of the company's financial woes is an accounting rule change for fiscal year 2017. New standards for revenue recognition and other adjustments will reduce 2017 profits from GE's industrial segment by about $1.56 billion, more than what was estimated by the company in November.

In addition to this setback, GE also said the effects of the U.S. tax overhaul would trim $0.14 cents a share from 2017 earnings. As if that weren't enough for the beleaguered behemoth, another reversal will be coming from a change in inventory measurement. After the changes are tallied in, numbers will now show GE lost $0.99 a share last year, worse than the originally reported loss of $0.68 per share.

These accounting setbacks mean more pain for GE’s countless shareholders, including retirees, who have been relying on the company’s payouts for years. Any pressure coming from the worsening financial situation is likely to force management to further reduce its $0.48 annual dividend, which had already been cut in half last year.

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One of GE’s biggest challenges will be to lower its leverage ratio, key to avoiding a further downgrade of its rating. The market consensus estimates for 2018 show that GE might end the year with its leverage at 4.6 times EBITDA. This is much higher than the 2.5 times EBITDA which Moody’s Investors Service indicated might be good enough to save the company from another ratings downgrade.

In November, Moody’s downgraded GE and its finance unit, each by one notch, from A1 to A2, putting the company's bond status just five steps above junk. At this stage, it may be catastrophic for GE if its creditworthiness is further damaged, particularly if and when it needs more cash from the debt markets.

That risk, coupled with the continued weakness in the company’s flagship power business, are probably the main factors compelling some analysts to call GE shares “expensive” even after the massive losses of the past six months which have pushed shares down to $13.66 as of yesterday's close. Stephen Tusa of JPMorgan believes, "GE is the most expensive stock in the sector.”

His bearish forecast on the company is based on the notion that a recovery in the company's power business won’t come any time soon, but rather during the next decade at the earliest. That means that right now there's not enough progress being made to offset share dilution coming from asset sales.

The Bottom Line

With so much uncertainty swirling around it, GE is not a stock for risk-averse investors. To be sure, the company has been making some progress on its asset-sale program, but it may still take years before there's any visible business transformation. Perhaps more significantly, it's likely a positive change on its balance-sheet won't be apparent for quite some time.

If you're an income investor, until GE's numbers look more promising, your most prudent course of action is to remain on the sidelines. The company reports Q1 2018 earnings on Friday, April 20, before the US market opens. Consensus expects an EPS of $0.11 on Revenue of $27.87.

However, it's what's said afterward, during the outlook portion of the call, that may offer some real insight on the company's future. This could provide an opening for contrarian investors willing to bet on the company’s turnaround over the long-haul.

Written By: Investing.com