In the midst of a one-year downward spiral, General Electric (GE) stock has been on life support, and a hefty yield was its only true life raft. Now, in the wake of a 50% GE dividend cut, GE stock is basically sunk.
General Electric’s new dividend will be $0.12 per share, down from $0.24 per share, reducing what was a 4.5% yield to 2.5% as of this writing. It was just the second GE dividend cut since the Great Depression. Not surprisingly, GE stock was down more than 4% in early Monday trading, pushing it to a new five-year low. For the year, General Electric stock is now down 38%.
For years, GE has been one of America’s most widely held stocks due in large part to its steady dividend. Now that that’s gone, income investors may start to purge GE stock from their portfolios in droves.
Though the size of the GE dividend cut is somewhat shocking, the cut itself was not. I wrote about it back in June on the heels of a research note from Deutsche Bank analyst John Inch, who issued a sell rating based on his belief that “the stage is being set for General Electric to cut its common dividend.” Inch cited insufficient free cash flow over the next two years as the reason, and believed General Electric could slash its annual payouts by as much as one-third. He was half-right!
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Even without the dividend cut, GE has been a sinking ship for some time. And a change at the top has failed to plug the hole. In August, John Flannery took over from embattled Jeff Immelt as General Electric’s new CEO. Flannery has said all the right things, and made significant cuts in an effort to shed $2 billion in costs by the end of 2018. But it hasn’t been enough to convince investors that the company is making any progress. Now, his cost-cutting has directly impacted GE shareholders.
The reality is, General Electric has been in decline for years. Under Immelt, the company became an industrial jack-of-all-trades but master of none. That identity crisis cost Immelt his job, and left GE with no real showcase segment or product to hang its hat on. It even jettisoned its signature lighting business because it wasn’t making money. The company as a whole hasn’t been making money of late, with profits declining in five of the last six quarters, including in the third quarter. Hence, the dividend cut.
Will GE stock ever recover from this? That depends on your definition of “recover.” Currently trading at 19, I doubt the stock has hit bottom yet—not in the wake of a 50% dividend cut. Could it get back to 20, 25 someday? Perhaps. But I doubt it will ever get back to its decade-high (41, reached just before the 2008-09 recession hit), or even its 2016 high (31).
In essence, the GE that was one of the market’s great growth stocks in the 1980s and 1990s is dead and never coming back. This week’s dividend cut may have been the final nail in the coffin.
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.Sign up now!