General Electric’s (GE) shares fell to fresh 52-week lows last week as investors continue to be negative about the industrial company. While negative analyst commentary and concerns over General Electric’s dividend sustainability have more heavily weighed on investor sentiment lately, I think General Electric makes for an interesting contrarian ‘Buy’ today.
General Electric is not in an enviable position, and neither are shareholders that bought into the industrial company at a much higher valuation in the past. General Electric’s shares have slumped 27.3 percent year-to-date, falling to one new low after another. Last week, General Electric hit a new 52-week low @$ 22.83, extending a multi-week streak of losses.
See for yourself.
A couple of factors have weighed on investor sentiment lately, including negative analyst commentary from JPMorgan that suggested General Electric might have to cut its dividend. According to a CNBC report, analysts at JPMorgan see a GE dividend cut as “increasingly likely”.
Not only did JPMorgan fuel the fire of doubt when it comes to General Electric’s dividend sustainability but the investment bank also lowered its price target for GE’s shares from $ 22 to $ 20, maintaining its firm ‘underweight’ rating on the stock. In addition, widely-followed media and investment personality Jim Cramer last week suggested that General Electric likely will cut guidance and may slash the dividend.
Given General Electric’s core industrial business weakness – keep in mind that GE’s industrial revenues slumped 12 percent and industrial/vertical EPS dropped 45 percent year on year in the second quarter on the back of a weak performance in oil & gas as well as transportation – a guidance revision is a distinct possibility, especially as it relates to GE’s industrial operating profit and margin guidance.
Source: General Electric
The real question, however, is whether General Electric will take the rather significant step and slash its dividend.
General Electric has cut its dividend in the past. The last time General Electric slashed its dividend payout was during the Great Recession when a lot of companies cut back on shareholder payments. In 2009, General Electric cut its quarterly cash dividend from $ 0.31/share to $ 0.10/share. However, GE’s dividend rate consistently edged up over the last eight years. General Electric’s long-term dividend history is impressive.
Source: General Electric
Will General Electric Have To Cut Its Dividend?
I don’t think General Electric will have to cut its dividend, although management could decide that it is better for the company to conserve cash and invest in General Electric’s industrial businesses directly. That said, here is why I think a dividend cut is relatively unlikely.
For one thing, General Electric has affirmed investors multiple times that the dividend is a ‘top priority’ for management. This statement suggests that management will remain committed to paying shareholders a steady dividend even though it costs the company a lot of cash. Remember that General Electric plans to return $ 8 billion in dividends to shareholders this year alone.
Further, I think General Electric will be able to maintain its dividend from a cash flow perspective.
General Electric has guided for $ 16-20 billion in free cash flow, including dispositions in 2017. A large part of this cash flow is contributed by GE Capital, which is expected to produce $ 6-7 billion in dividends for GE this year. In the first six months of 2017, GE Capital has already beefed up General Electric’s cash flow by $ 4 billion, making up for a significant portion of General Electric’s dividends to shareholders.
GE Capital dividends indeed play a crucial role in propping up General Electric’s cash flow. General Electric’s industrial free cash flow excluding deal taxes and pension expenses was actually negative $ 1.6 billion year to date, and total FCF only turned positive because of GE Capital’s dividend to the parent company. Shareholder dividends therefore depend largely on GE Capital’s cash flow, while GE’s industrial business on a standalone basis does not have the cash power right now to fund those payments.
Source: General Electric
I don’t think that General Electric will have to cut its dividend, though. General Electric has guided for $ 19-21 billion in capital returns this year of which only $ 8 billion are cash (and recurring). In other words, as long as GE can fall back on GE Capital for its dividend payments and the company cuts back on share buybacks, there is no immediate need to cut the dividend.
General Electric could adjust its dividend payout. Yes, but I consider this not that likely considering past management statements that the dividend is a ‘top priority’ and considering that GE Capital produces a LOT of cash for General Electric. General Electric has an impressive long-term dividend history which signals its commitment to shareholders, and I doubt management wants to put off investors with another dividend cut. I think investors are a bit too fearful right now, which is exactly the right time to get greedy. Buy for long-term dividend income and capital appreciation.
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Disclosure: I am/we are long GE.
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