Narrow-moat-rated General Electric (GE) reported third-quarter earnings that were broadly in line with our full-year expectations, except for the power business. However, GE Capital has performed stronger year to date than we anticipated. We’ve made some puts and takes in our model, but our long-term outlook is the same. We expect to raise our fair value estimate by a dime, to $16.20 per share from $16.10, primarily due to the time value of money. There were two big-ticket items in the earnings release, in our view. First, the firm is cutting its dividend effective December, to $0.01 per share from $0.12. Second, GE is reorganizing the power business and is separating it into two units; one will focus on the gas business, while the remaining portion will center on the steam, grid solution, nuclear, and power conversion business. But as we expected, new CEO Lawrence Culp is sticking to the aviation, power, and renewable energy plan that former CEO John Flannery laid out.
We’re not surprised by the dividend cut. If anything, we’re surprised by the firm’s intention to keep the dividend at all. As of the second-quarter earnings release, GE had paid just over $2.2 billion in dividends year to date, but it was in the hole for industrial free cash flow at negative $1.4 billion. Prudent capital allocation dictates that excess cash should be returned to shareholders, but GE has a narrow window of free cash to reinvest to remain competitive in its businesses. This will continue to be an issue as Moody’s and Fitch re-examine GE’s credit rating. It would have been our preference for the dividend to be eliminated in its entirety. Culp says the move should allow GE to retain about $3.9 billion of cash per year compared with its prior payout level.
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Joshua Aguilar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.