Cash flow never lies. That is my guiding principle when performing financial analysis. In the case of GE (GE) that axiom needs to be upfront in investors' minds. I called a bottom in GE in my Real Money column of April 20 and I'm sticking with that call. In Wednesday's trading, however, GE shares recorded their biggest one-day percentage decline more than nine years. That decline was caused, I believe, by CEO John Flannery's wishy-washy comments on the company's troubled Power division. He noted that he doesn't see a turnaround in that division until 2020 at the earliest, and that spooked investors.
Others focused on Flannery's opaque comments on the company's dividend at that conference. GE shares rebounded this morning after a report by CNBC's David Faber that GE has no plan to cut its dividend again, after halving its quarterly payout to 12 cents a share in November.
A cursory glance at GE's long-term stock chart shows, however, that the shares' decline began well before that dividend cut. At a current price of $14.50, I don't think GE's yield of 3.3% is impacting institutional investors' decision whether or not to hold GE shares in any meaningful way.
That's the point, really. Cash flow never lies, and GE's cash outflows have been stunning to the market. GE's guiding figure is cash flow from operating activities (CFOA) and, on an industrial basis (ex- GE Capital) GE produced a negative CFOA of $1.681 billion in the first quarter. When I first read GE's results on the morning of April 20, I actually exclaimed "whoa" when I saw that cash burn figure on page 12 of the company's release.
On page 66 of GE's first-quarter 10-Q -- and, believe me, it is not a labor of love to dig through GE's documents -- GE discloses that it paid $1.043 billion in dividends to shareholders in the first quarter. So, how do those two figures--a $1.7 billion cash outflow and a $1 billion outflow from dividends--jibe? The short answer is they don't, and that's why GE needs to stop paying a common dividend.
As per David Faber's reporting, it appears that the company's board has not yet reached that conclusion, but it is undeniably the fiscally prudent move.
How much would that hurt GE shares? In my opinion, not at all on a long-term basis. GE's projection of $6-7 billion of free cash flow in 2018 excludes the $6 billion in pension contributions the company has planned. With the balance of those payments happening in the final three quarters of the year (GE only contributed $287 million to its pension the first quarter) the lights are flashing red for GE's cash flow, and omitting the dividend is an obvious way to improve those metrics.
GE bought back a princely sum of $8 million in stock in the first quarter, and any free cash flow that the company generates in future periods should be used for share repurchases and dividends. If omitting the dividend causes another short, sharp shock in GE's share price, then the company could buy these shares back even more cheaply, which is a win from a financial perspective.
So, that's my prescription for GE's dividend: don't pay it. It doesn't seem as if GE's management and board are listening to this prescription, but eventually they will have to. After all, cash flow never lies.