Oh, God, please make it stop.
That was my first reaction on hearing the news over the weekend that General Electric (GE) would restate earnings for 2016 and 2017 to account for the implementation of a new accounting standard. GE is in such a state of malaise at the corporate level, and it just seems like a constant barrage of bad news is emanating from the industrial giant.
Even when the news items are not truly new -- the accounting standard that GE is enacting was passed by the Financial Accounting Standards Board in May 2014 and took effect for reporting periods beginning after Dec. 15 of last year -- these "truth bombs" are just hammering GE stock.
I noted this in my two-part series on Real Money on GE CFO Jamie Miller's presentations to investors last week, and this week is certainly not starting off on a brighter note for GE shareholders.
GE shares hit a 52-week low of $13.95 in Monday morning trading before recovering a bit, but the relevant fact is that the shares are breaking through the $14 level for the first time in eight-and-a-half years. That's astounding, especially given what the markets have done in that Fed-fueled period.
The restatements required by the standard -- ASU No. 2014-09, Revenue from Contracts with Customers -- are certainly material, as GE noted in its 10-K filing Friday that 2016 and 2017 reported EPS would be restated downward by $0.13 and $0.16, respectively. The changes in revenue recognition are non-cash, and that's the key point financially, but optically, it just looks bad for a company that reported EPS from operations of $1.05 for 2017 to now state that that figure really should have been $0.89 per share.
Ms. Miller was forthright in last week's presentations that analysts should be expecting the low end of GE's guided range of $1.00 - $1.07 for 2018 EPS. How much of that conservatism is based on an understanding of the new accounting treatment for revenues from long-term contracts is unclear to me.
What is clear, though, is that GE's dividend payout ratio is inflated. To have paid out $0.84 in 2017 on EPS that we now know were really $0.89 just makes no sense, and to be paying out $0.48 prospectively on EPS that are going to struggle to hit $1.00 is aggressive. I don't like to see industrial companies go above a 40% payout ratio, and I think that GE's dividend will be lowered before it is raised. Only the company's board of directors knows for sure, and the fact that GE just nominated three new candidates for election at April's annual meeting can only muddy those waters.
I spent 11 years as a sell-side equity analyst being handsomely compensated for musing over the impacts of rulings like ASU No. 2014-09. Just having to skim GE's 322-page 10-K filing to research this column was a reminder of how torturous such detailed research can be.
Now, as someone who actively manages assets for my clients, the calculus is much simpler. GE is just a bad news machine, and in a market that has shed its recent correction like a homeowner sheds an old GE refrigerator, I just cannot have a poor relative performer in my clients' portfolios.
I haven't owned GE shares in the seven-and-a half-year history of my firm, and that has proven to be a lucrative "non-decision." If and when I perceive that the constant stream of negative announcements is ending I might jump in to buy a few shares.
Not today, though.
