On Monday, shareholders in General Electric Company (NYSE:GE) were subject to even more pain. Not only did the company announce a slashing of its dividend, but GE stock went on to make new 52-week lows as well. Down roughly 8% Monday and hovering near $19, is GE stock worth buying?
General Electric reported earnings in mid-October. The results were worse-than-expected — and that’s putting it mildly. Earnings of 29 cents per share missed estimates of 49 cents a share by more than 40%. Management slashed guidance and told investors the dividend was be evaluated.
None of this should come as a surprise. I have broken down the company’s cash flow issues that would make maintaining its dividend nearly impossible. However, investors knew they would find out more at the company’s Nov. 13 investor meeting. Well, here we are and the GE news isn’t good.
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Many analysts were looking for a 25% to 40% cut to the dividend. Instead, on Monday management announced a 50% slashing to the dividend, now paying out just 12 cents per share quarterly. The company figures it will save about $4 billion a year as a result. While that’s great for the business, the yield drops to just 2.5% for investors.
Management cut 2018 earnings per share guidance to $1.00 to $1.07 vs consensus estimates of $1.14. GE is cutting its board down to 12 members from 18 and adding representation from Nelson Peltz’s Trian Partners firm.
GE will spin-off or sell its locomotive business and focus on healthcare, power and aviation. The company will also put a wider focus on its digital transformation. Make no mistake, it will take General Electric a few years to get where it wants and needs to be. But the change, in my view, will happen. GE will make a comeback.
What About GE Stock Price?
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All that may be fine and dandy, but who wants to sit through a lengthy 12-24 month turnaround? Without a dividend yield to satisfy investors in that time (which would be between 4% to 5% before the cut), why hang around? That’s what investors are collectively saying Monday, puking up GE stock.
Recently, we found JPMorgan Chase & Co. (NYSE:JPM) analyst Stephen Tusa’s take on GE. He’s been way ahead of the market with GE, consistently cutting his price target before the stock’s decline. His latest target is $17 and who knows if he’ll be out soon with a lower one. After all, GE’s 2018 earnings guidance came in below the $1.10 midpoint Tusa has from in his $1.05 to $1.15 range.
Could it be headed to $17 and possibly even lower? We’ll have to see where GE stock starts to find buyers and set up a base to trade against. For now, there’s not much in the way to at least pushing the stock down to $18. Even there, it’s just “kiss-support” from back in 2015 during the flash crash.
More significant support sits at $17 and even lower at — gulp — $15. At $16, GE stock will sport a 3% yield. Declines of this magnitude may seem unrealistic given the fall GE stock price has already seen. But I would point out many said the same thing about Under Armour Inc (NYSE:UAA). It hasn’t stopped UA from tumbling.
The Bottom Line on GE Stock
I don’t want to be all doom-and-gloom. On the plus side, I do believe General Electric will turn around its woes. It will recreate itself to focus on long-term secular growth stories and have a respectable, cash-generating power business down the road. Digital transformation will take place and allow for GE to book high-margin recurring revenue.
But that said, we’re not there yet. Institutions are walking away and GE stock will struggle. Since 2010, 3.75% has been pretty strong support on the yield. Frighteningly, it would take a decline down to $13 to get there. Let’s hope that’s not the case. But let’s also realize that a decline down to $17 certainly isn’t off the table. Maybe even worse. We need patience with the shares at this point.
And why rush into GE when there’s plenty of others already excelling in similar industries? Honeywell International Inc. (NYSE:HON) is doing well, near 52-week highs and just bumped its dividend by 12%. United Technologies Corporation (NYSE:UTX) is also doing well and just raised dividend by 6% earlier this summer. Danaher Corporation (NYSE:DHR) and 3M Company (NYSE:MMM) tell similar stories (with 12% and 6% dividend hikes too, respectively).
Let’s put it this way. GE trades at roughly 19 times 2018 earnings estimates, in-line with HON. It trades at a premium to UTX. That doesn’t seem right. I’m not buying yet.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
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