General Electric Company (NYSE:GE) has long been a core holding of yield-centric investors,
but now its much-beloved dividend may be in grave danger of a major cut.
That’s according to Deutsche Bank analyst John Inch, who cut GE to a Sell last month. In a note to clients, Inch explained his bearish view on the stock, and made the case for why the company may — and probably should — lower its dividend (emphasis ours):
Per GE’s cash guidance of $27bn (CFOA) in 2017-2018 (total $25-29bn), this implies $13bn CFOA (midpoint target this year) and $14bn next year. After subtracting capex of ~$3.5bn and required pension of ~$1.8bn/yr for 2 years, FCF of $7.7bn in 2017 would fall short of the required ~$8bn of common dividend funding and just above next year. Note, too, that $7.7bn would equate to roughly 85 cents of free cash flow this year and roughly $1.00 in 2018. However, GE pays out 96 cents in annual dividend, or significantly more than the 85 cents of 2017E Industrial FCF and roughly in-line with the $1.00 in 2018E. Considering that proceeds from Capital dismantlement and asset sales eventually go away, this high dividend payout would not appear sustainable…
We believe the stage is being set for GE to cut its common dividend, likely as part of an earnings “reset” lower and possibly in conjunction with eventual future leadership change.
Inch isn’t the only analyst on Wall Street that’s taken a cautious view on GE. This week, CNBC’s Jim Cramer also expressed some concerns, echoing Inch’s comments that its CEO could be ousted if he can’t clear up the company can’t clear up its cash flow issues soon.
Cash flow, of course, is central to being able to pay out a regular dividend. GE’s lofty ~3.5% yield could well drop precipitously in the near future if the company can’t turn it around quickly.
General Electric Company shares closed at $27.88 on Friday, up $0.16 (+0.58%). Year-to-date, GE has declined -11.07%, versus a 9.71% rise in the benchmark S&P 500 index during the same period.