General Electric faces another downward spiral. The company plans to keep the company alive by saving nearly US$4 billion per year. GE announced on Tuesday that it would slash its dividend from 12 cents to a mere penny.
A 119-year Old Dividend to a Penny
In the past, GE had been one of the biggest dividend payers in America, behind company giants like Apple, ExxonMobil, and Microsoft. But GE is now in financial crisis and faces enormous pressure to restore its investors’ confidence, which was shaken by a severe cash crunch.
On releasing its third-quarter earnings on Tuesday, GE said it would be cutting its quarterly dividend to 1 cent per share starting in 2019. Under the new Chief Executive, Larry Culp, it is the company’s first step on its plan to revive the struggling conglomerate and restructure its power unit. The dramatic dividend cut will help the company to retain about US$3.9 billion of cash per year compared to the prior payout level.
Culp, the first ever outsider CEO of GE, was just appointed to the position on October 1. He faces an enormous challenge to turnaround GE’s debt-riddled balance sheet by shrinking cash flow and slumping power division.
GE also announced that they are grappling with an investigation into GE Capital’s accounting practices. It is examining the deterioration of businesses it has acquired.
Jamie Miller, GE’s Chief Financial Officer, said that they are cooperating with the SEC and Justice Department to continue their work on these matters. The Securities and Exchange Commission is said to look not only at how GE accounts its reserves but its goodwill charges as well.
GE’s Cash Flow Problems
For over a century, GE has been an icon of corporate stability and has paid a cash dividend to its investors. These quarterly payments ensure that investors get what they wanted from the company.
Since GE is under financial stress, some analysts have said that GE Capital needs a cash infusion of billions of dollars to regain its power. Moreover, analysts expect the company to sell its stocks to strengthen GE’s balance sheet. But Culp denied this and said GE has no plans to raise equity.
“Let me state in a straightforward fashion, we have no plans for an equity raise,” said Culp.
While the aviation business has been bringing strong revenue to the company and healthcare remains a steady performer, GE has been struggling with its power and renewables businesses. The company’s slumping power-generation unit is the biggest problem the company is facing now.
John L. Flannery, the company’s previous chief executive, had acknowledged that GE’s power-generation unit was reeling when he was appointed to the position. This problem was never resolved and continues to pull the company down.
A decline of almost 33% is seen in GE’s power revenue last quarter due to a “continued market and execution challenges.” There was a massive loss of US$631 million from the GE power division, compared with a profit of US$464 million a year before.
What’s Next for GE?
With GE losing a lot of profit in its power sector, CEO Lawrence Culp announced on Tuesday a new power structure. He intends to split the company into two different divisions: one that focuses on gas operations and the other on nuclear, steam, grid and power conversion. Culp also added that he plans to “consolidate” GE Powers headquarters structure.
Analysts have been anticipating GE’s potential dividend cut, but they weren’t expecting weaker-than-expected earnings on GE’s quarterly report. For GE, it seems like it was necessary to save the company. GE must grab the slightest chance to turn around and regain its power.
Investors might be unhappy with GE slashing its dividend to a penny but Culp’s current priority is to focus on positioning the business to win so that it would have enough money to run on. Although this move means there will be fewer investors in the company, Culp needs to put the company first.
With the help of his team, Culp is hopeful with his turnaround plans to regain GE’s power. The CEO stated: “We are committed to building a stronger General Electric.”