I called General Electric (GE) a "bad news machine with an inflated dividend" in a prior Real Money column. On Wednesday the company lived up -- or down -- to that reputation.
Russell Stokes, president of GE's Power division, confirmed in a LinkedIn post that GE's HA-Series turbine blades had "an oxidation issue." J.P. Morgan analyst Stephen Tusa did his homework, confirming that the issue had occurred at an Exelon (EXC) generation facility in Texas, and cut his price target on GE Thursday morning to $10 from $11.
So, that's just another example of bad news from this company that has had nothing positive to report from its Power segment in several years. The restructuring plan GE announced June 26 comprehended a sale of the company's Healthcare segment businesses and a divestment of its stake in Baker Hughes (BHGE) , so Power takes on an even greater stake in the business composition of "the new GE."
On Sept. 10, GE's board of directors declared a $0.12 dividend payable Oct. 25, and that newly reconfigured body may be the only group of 12 people that believes that GE should be paying a dividend at that level.
I don't believe GE should be paying a dividend at all, and whether it is cut in increments or omitted entirely, a change is needed. The company's cash -- GE is burning cash from operations but presumably will receive cash proceeds from divestitures -- would be much better utilized to service debt in the near term and buy back stock over the longer term.
Just as a chess player does, an investor has to be prepared for the next move. I think Tusa is correct and GE shares have more downside. If they approach single digits, then the math becomes more clear. The consensus forecast for GE's 2019 earnings per share is exactly one dollar. It's impossible to know what each analyst is thinking in terms of the composition of GE in 2019 with regard to timing of divestitures, but a buck is a round figure and it's a good benchmark.
Omitting the dividend would, in my opinion, knock GE shares down to $10 or below. And that's when I would buy them. It may seem completely counterintuitive, but that's when a stock trading at 10x earnings would just be too cheap to ignore.
Saving $4.2 billion in annualized common dividend payments would make GE a healthier credit, and in these cases the bond market usually leads the stock market. One year ago today, GE's 4.418% 2035 notes (technically issued by GE Capital International) were trading at $108.93. Today they are quoted at $95.68.
So, GE stock's 3.83% yield offers some competition for the 2035 notes' current 4.79% YTW (yield to worst call,) but that math, in a nutshell, is how to lose money. The numbers are similar for Ford (F) and AT&T (T) and all three stocks (F, GE, T) have been horrible laggards in this never-ending bull market.
So, GE is getting no return for its dividend and its financials (and bond pricing) show that it could use the cash. As Jerry Seinfeld tells George Costanza "if every instinct you have is wrong then the opposite must be right." GE needs to act like George and do the opposite.
Omitting a dividend after 119 years of paying them would indeed be a difficult decision, but it needs to be made. Going from $0.12 quarterly to $0.06 or some such number would be a half-measure and I don't invest in turnaround plays that are executing half-measures.
A dividend-free GE trading at about $10 per share and 10x 2019 earnings estimates would be attractive, and I would buy it for a quick 20% bounce, if nothing else. Until that happens GE shares are uninvestable, and, to continue the Seinfeld theme, I can't stand 'em!
