General Electric: The Harsh Truth for Dividend Investors

  • 4 Months ago
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General Electric: The Harsh Truth for Dividend Investors

  • General Electric has lost more than 35% of its value so far this year.
  • Many investors are now in panic mode, as the company’s ability to maintain its reputation as a quality dividend payer has been demolished.
  • It is time to take a step back and look at the broader contextual picture in order to determine whether or not a true recovery for the company is possible any time soon.

In early October, we were one of the first analysts to suggest the possibility that the prized dividend offered to those holding long positions in General Electric (GE) was actually at risk.  Needless to say, this was an outlook that was not exactly accepted with open arms.  

But the market perception has now shifted in ways that fall in line with our initial stance, and this has forced income investors to make some tough decisions in terms of their long-term portfolio strategies.  Given the rate of the declines in GE’s stock valuation, the concerns are not entirely surprising.  At this stage, many investors view the dividend as the central reason to hold the stock and any reductions would mark only the third time in the company’s 125-year history that such a drastic action would be deemed necessary.  

Critical questions remain unanswered, and GE CEO John Flannery still has a lot of explaining to do in terms of the strategic directions that will be undertaken over the next several quarters.  For these reasons, it is important for investors to take a step back and look at the broader contextual picture in order to determine whether or not a true recovery for the company is possible any time soon.

In the five-year chart shown above, we can ultimately see why many investors have viewed GE’s dividend as a life raft in a broader sea of chaos.  The stock has fallen off a cliff over the last year and we are essentially back in the same valuation territory that was in place in 2012.  This comes as the SPDR S&P 500 Trust ETF (SPY) has posted capital gains of nearly 87% with almost nothing to be seen in the way of downside selling.  This is dangerous territory to say the least, and this is why we recommended that dividend investors exit positions and wait on the sidelines until the dust settles in this industrial mega-conglomerate.

Does this mean that we will maintain this stance for the long-term?  Not necessarily.  There are several positive economic factors that should at least provide GE with the footing it needs to generate upside surprises in upcoming earnings reports if the company can right the ship, clearly define its strategic directions, and restore investor confidence in its comparative positioning.  Broader industrial production activity in the US has surged since the beginning of 2016 in ways that suggest real demand in a number of different sectors, and the pro-growth policy agenda that has been outlined by the Trump administration is having its desired effect in measurable ways.  This is the type of environment GE will need in order to revamp its struggling business segments and the consistency in the data suggests that these are trends that will not be ending any time soon.

Perhaps the best example of these constructive scenarios can be seen in the upside surprises in national economic growth.  The Trump administration has not yet been able to influence markets with reforms in areas like taxes and healthcare.  As long as we are able to see continued progress in these areas, underlying growth rates should remain supportive in ways that benefit companies with the size and industrial reach of General Electric in its broad sector exposure.

Monetary policy is another area that will have a critical impact, as lower interest rates will continue to pressure valuations in the US Dollar and provide consumers with access to cheap credit for larger purchases.  Donald Trump’s selection of Jerome Powell as the new head of the Federal Reserve suggests that markets could actually see dovish surprises in the interest rate schedule that was previously proposed by Janet Yellen.  Even if this is not the case, it will take a lot to actually change the interest rate picture in the US and this is something that should create supportive growth tailwinds in the quarters ahead.

GE Chart Analysis:

So to say that General Electric is in a period of flux might just be the understatement of the year.  All of the activity should provide long-term investors some interesting lessons (if nothing else) in terms of the ways it shows us how to position in heavily bearish markets.  The stock trading platform has already moved through its 2-standard deviation Bollinger Band and the bearish readings in the Commodity Channel Index show now signs of abating any time soon.  

To the downside, the next level of support comes in near 14.80 and we will need to see how markets behave on the approach of these areas in order to determine whether or not there is real potential for a sustainable bounce.  We have not entirely given up on this stock from the bullish perspective.  But any positioning here should not be viewed as something for the faint of heart, and trade sizes should be kept small with protective sentiment in mind.

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