Is a General Electric Dividend Cut Coming?

General Electric’s (GE) high-yielding dividend has been a saving grace during a topsy-turvy period for GE stock. So a new report forecasting a General Electric dividend cut could be a devastating blow to the stock.

The report about GE comes from a research note by Deutsche Bank analyst John Inch. He thinks the “stage is being set for General Electric to cut its common dividend,” and issued a Sell rating with a price target of $24 (GE stock currently trades above $27). Inch cited insufficient free cash flow over the next two years as the reason, and believes General Electric could slash its annual payouts by as much as one-third—from $0.96 presently to as low as $0.65.

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The writing may have been on the wall. General Electric increased its dividend by a penny per quarter in December, though that was the first time it had upped its payout in more than two years. The holding pattern in GE’s dividend has coincided with a steep decline in the company’s free cash flow, which stood at $26 billion in late 2014 to a loss of -$7.7 billion over the last 12 months. That kind of precipitous cash flow drop-off (with more to come, according to Inch) forces a company to make up for it elsewhere. In GE’s case, it seems its dividend could be the casualty.

Even prior to Inch’s unflattering research note, things weren’t going so well for General Electric stock. It’s down more than 13% year to date, and has been plumbing new 52-week lows on almost a daily basis during the last two weeks. While 2016 was a decent year for GE, the fact is the stock hasn’t budged in two years. A 3.5% yield has been the only real thing it could hang its hat on.

Thus, a General Electric dividend cut could extend the selloff in this heretofore high yield stock, particularly with analysts expecting a 13.3% sales decline and 50% EPS decline in the current quarter. After showing improvement in the first half of 2016, GE’s sales have slipped in each of the last two quarters.

Once one of the market’s most reliable blue-chip stocks, General Electric now feels like a dinosaur. It traded as high as 57 before the dot-com bubble burst and was still at 41 a decade ago. Hit hard by the recession, falling as low as 8, GE stock hasn’t even approached pre-recession levels. The apex came last summer, when the stock hit 32. It’s down 17% since then.

GE stock has been in a downward spiral of late. A forthcoming General Electric dividend cut won't help matters. Having scarcely traded above its 50-day moving average since January, and with previous support disintegrating earlier a couple weeks ago, there’s little preventing GE from tumbling even further. If the dividend gets slashed by a third, there will be nothing to prop it up.

Chris Preston

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Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.

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