General Electric: Stocks Knocked Down, but not Knocked Out
General Electric (NYSE: GE) has been on a massive tailspin with its stock witnessing a stunning decline of nearly 40% in 2017. As a part of the Dow Jones Industrial average; which is a basket of blue-chip companies, GE has been going on an exact reverse path compared to the Dow Jones growth of 40% during the same time period.
It may sound like a cliche, but there is an end to every rainy day and at some stage investors will need to prepare for the aftermath to the carnage that has recently been visited upon those long GE.
Q4 2017 saw the revenue at $ 31.4 billion which was a fall of 5% relative to Q4 2016.The full year results were hit by 1% too. The segments that fuelled the disappointment were power and insurance charges. Revenue in the power business was down by 15% (primarily due to project cost over-runs), litigation settlements, lower pricing, and absence of water income.
GE also took a $6.2 billion hit due to the higher costs in its insurance business, which was a setback to its turnaround strategy for 2018. The adjusted EPS was at $1.05, which was lower than GE’s expectations.
All in all, the portfolio moves, the Republican tax reform, the insurance charge, and the falling power business created series of substantial blows to the company in 2017. This has forced the executives to put a growth plan in place which will enable the company to build its free cash flow.
The Dividend payout of GE also suffered a bashing in December 2017 as it was slashed from $0.24 to half of its price of $0.12. Rather than limping ahead with an unaffordable dividend, GE decided to cut it which makes a rational sense for GE and will save more than $4bn per year.
This cut makes it the biggest reduction GE has made since the economic downturn of 2009.
Some of GE’s competitors are facing similar challenges. However, considering the dividend history and the business growth, currently, small term investors can be better off with other stocks like Emerson Electric (NYSE: EMR).
Even though both companies have a dividend yield of around 3%, Emerson has been increasing its dividend each year for the past six decades and has been faring better due to the manner in which it restructured its operations and business model in 2016.
What is in store for shareholders?
As presented by the top executives during GE’s Q4 2017 earnings release conference, the company is reshaping and restructuring its businesses in 2017 keeping in mind the many challenges that lay in their path. What’s in store for 2018?
- Achieving a strict focus on controllable cost pools
- Restructuring the management and cutting expenses
- Reducing the structure and footprint by 30% till 2020
- Continuing its cash generation disciplines, and targeting cash flows of $6-7bn
- Increasing the cash balance to $15bn by end of 2018
Even though investors would be pessimistic about GE, it may be beneficial to look it as an entry point keeping in view the vision that has been laid out by the CEO John Flannery. Blue chip companies like GE need to undergo gigantic turnarounds and 2018 is slated to be one of those.
For shareholders, this would be a temporary pain for a future gain. However, for long-term investors, it would be an opportune time to invest in GE with a long-term outlook, maybe 2019 and beyond.