GE Dividend May Be at Risk

We plan to cut our fair value estimate by as much at 10% following General Electric's third-quarter earnings report, which revealed deeper challenges in the power segment than we had anticipated.

Underperformance in the power segment weighed heavily on industrial cash from operations, causing new CEO John Flannery to halve management's original 2017 target. With only $7 billion now expected for the year and approximately $3 billion to $4 billion of anticipated capital expenditures, industrial free cash flow will fall far short of GE's $8 billion dividend commitment. More concerning is the proposed suspension of GE Capital dividends. Absent these dividends to the parent, and with Flannery positioning 2018 as a reset year, we think it would be irrational for GE to maintain its current dividend. Flannery did not explicitly confirm a cut but hinted that GE would be managed for total shareholder return going forward.

When Flannery shares his strategy Nov. 13, we expect he will outline steps to rightsize the power business and drive excess costs out of the entire portfolio. From a long-term perspective, we think all is not lost. When excluding the power and oil and gas segments, the rest of GE's wide-moat portfolio reported 2% organic revenue growth, 250 basis points of margin expansion, and strong growth in high-margin service orders in the quarter. This is a solid foundation that can produce attractive future returns under better management.