GE's Dividend: Should Investors Be Worried About a Cut?

 | Oct 19, 2017 | 5:00 PM EDT
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It happened in 2009 during the financial crisis and now Wall Street is speculating whether General Electric (GE) may do it again: Cut its dividend.

GE will report its quarterly results on Friday, Oct. 20.

Recently, J.P. Morgan analyst Stephen Tusa said a dividend cut is "materially higher," especially in the wake of weaker fundamentals and board and management changes. The company has said that its dividend remains "a top priority", but investors have reason for concern.

At the moment, GE's dividend yield, at 4.1%, is more than twice that of the S&P 500 index (1.9%). And the stock, down 25% year to date, is the worst-performing Dow component this year. By contrast, the S&P 500 is up some 14% year to date.

"Anytime a stock's dividend yield goes up because the share price goes down, you have to wonder if the dividend is sustainable," said Vahan Janjigian, the chief investment officer of Greenwich Wealth Management. "The decline in the stock price is telling us that investors think there is a good chance that the dividend will have to be reduced or eliminated."

Yes, GE management said its dividend is a priority, but Janjigian believes that GE can only sustain the dividend if energy prices move higher. "The company has invested heavily in the energy sector and is positioned to profit from higher oil prices," he said. "In fact, oil prices have been showing some strength recently and OPEC finally seems serious about keeping a lid on production no matter what U.S. frackers do."

For his part, Janjigian predicts that oil prices will approach $60 a barrel before long. "That should help improve GE's cash flows and improve the prospects for the dividend," he said. Oil was trading at $51.58 Thursday afternoon.

His advice to investors: "I think the stock could go a little lower in the near term. I'd advise investors to wait. They might want to place limit buy orders about 5% to 10% below the current price."

Meanwhile, another analyst thinks, per the promise made in July from GE CEO John Flannery to shareholders, the dividend is safe for now.

"However, the recent shakeup in management, where Jamie Miller will be taking the helm of CFO from Jeff Bornstein has created concern that she may not be as dedicated to the repeated promises made by Bornstein that the dividend is safe," said Alex Dietz, a research analyst with Private Asset Management. "In our view, we think the company can continue to pay its dividend through 2018 as it shakes out the new company strategy, which will hopefully turn negative cash flows seen in 2016 and 2017 YTD positive in 2018."

Currently, Dietz said, GE is paying out more in dividends than what they retain after capital expenditures, which is OK for a cyclical company with extra debt capacity, but eventually they will either need to increase cash flows from operations or they will need to adjust their dividend accordingly. "We will be watching for any commentary on the dividend in the upcoming earnings call on Oct. 20, and then assess the new strategy and initiatives laid out by the new CEO, John Flannery, on Nov. 13," said Dietz.

To be fair, one of the cons to owning GE is that it is such a large company. And that means, said Dietz, that any changes in strategy made by the CEO will likely take time to play out, which means we will not see immediate changes in operating results.

"Additionally, the company's wide reach of operations makes their reporting of results very complex and difficult for individual investors to analyze," he said.

The biggest pro to owning GE right now, said Dietz, is that in a market where valuations are sky high, GE looks very attractive. The caveat to that, however, is that GE may stay that way for a while.

"While valuations look very attractive, investors must remember that changes will take time to have an effect on the company's bottom line and could end up looking attractive for an extended period of time," said Dietz.

And in the main, Dietz is positive on GE. "We think that GE, the world's largest manufacturing company, will likely overcome the near-term problems that the company faces," he said. "We are hoping to see a plan with a clear focus on digital strategy and industrial solutions to drive growth and innovation as well as an outline to reduce corporate costs."

Another adviser, however, is quite bearish -- as in short the stock.

"We are short GE not because American industrial power is crestfallen -- to the contrary - GE is one of the few weak zebras in an otherwise strong pack of industrial stocks," said Charles Trafton, managing partner with FlowPoint Capital Partners. "We are short GE because production oversupply, price pressure and declines in tax credits are driving cash flows lower."

What's more, Trafton believes GE will have to cut its dividend if it doesn't engage in asset sales, as it's now paying out more in dividends than it's earning. "GE bought into energy services just as oil went from $125 per barrel to $45 barrel, and the CEO was fired earlier this year amidst results that left the Street nearly speechless," said Trafton. "Meanwhile, the shares of many industrial companies GE competes with are at or near all-time highs amidst record profits."

-- This article was updated on Oct. 19 ahead of GE's earnings report on Friday, Oct. 20. 

-- Robert Powell is a contributor to TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more.

General Electric is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GE? Learn more now.

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