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GE Investors Brace for Dividend Cut -- WSJ

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11/11/2017 | 08:47 am


New CEO Flannery is expected to announce strategy Monday, along with possible layoffs



By Thomas Gryta



This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 11, 2017).



For General Electric Co. shareholders, the wait will soon be over.



John Flannery, GE's new chief executive officer, on Monday is expected to reveal his strategy for the struggling conglomerate. Investors and analysts are bracing themselves for a broad rethinking of how the company operates, including shedding business units, a potential dividend cut, and layoffs among GE's nearly 300,000-person workforce.



"It really has to be a wholesale overhaul of the business model," said Deane Dray, an analyst at RBC Capital Markets. "The market is looking for a definitive action."



"We are looking forward to updating investors at our analyst meeting on Monday," a GE spokeswoman said.



GE shares are down 37% this year, reaching lows not seen since 2012, while the S&P 500 has risen 15%. GE's stock is down 22% since mid-July, when the company told investors to wait nearly four months for Mr. Flannery to complete his review of the business.



A dividend cut is widely expected. The company has paid one since 1899 and last cut it in 2009, during the depths of the financial crisis. Its previous dividend cut was during the Great Depression.



When he was named CEO in June, Mr. Flannery said the dividend was safe but warned in October that his thinking had evolved during his review. His predecessor Jeff Immelt described the 2009 dividend cut as the worst day of his tenure as CEO, coming just weeks after he reassured investors that he wouldn't make such a move.



This time around, a dividend cut is on the table because of the company's own performance rather than because of a weak economy.



Mr. Immelt reinvented GE after inheriting it from Jack Welch, moving it into new businesses while exiting struggling ones, but many observers now see sprawl and a need to streamline operations. Mr. Immelt sold multiple businesses such as media, appliances and financial services, but also made ill-timed bets on the oil-and-gas industry.



According to people familiar with Mr. Flannery's internal review, nothing is being ruled out, including a breakup of the company.



GE's restructuring may help explain a change to the dividend, as the company could struggle to produce enough cash to cover a payout that exceeds $8 billion a year.



"If you make all kinds of portfolio moves and divestitures, you are changing the earnings basis of the company," said RBC's Mr. Dray.



Mr. Flannery hasn't been waiting for the investor meeting to make major moves. He has already delayed the completion of GE's new headquarters in Boston, grounded its corporate jet fleet and announced plans for layoffs and research-center closures.



The company is looking to exit its railroad business, one of its oldest, along with its health-care information-technology business, part of its plans to divest more than $20 billion of assets in the next two years.



Mr. Flannery has been shaking up GE's management ranks, replacing Chief Financial Officer Jeff Bornstein with Jamie Miller, who will be in the spotlight on Monday. Mr. Flannery is looking at the makeup of the company's board and last month gave activist Trian Fund Management a seat.



Mr. Flannery "is sure taking out bolt-cutters to almost every aspect of GE," said Nicholas Heymann of William Blair & Co.



Unlike most other analysts, Mr. Heymann doesn't see the dividend cut as a foregone conclusion. "At GE currently there are not a lot of things that are end-of-the-world grim," he said.



Mr. Dray, however, believes the market has already priced in a dividend cut, based on GE's current stock price. Another analyst, Deutsche Bank's John Inch, also expects a cut but scoffed at the idea of GE breaking up or spinning off major divisions like GE Power.



"In our view, this is not possible," Mr. Inch said, noting that the company has $136 billion in debt on its balance sheet. "GE has to maintain cash flow to backstop and guarantee its bonds as well as other substantial GE Capital liabilities such as insurance."



Write to Thomas Gryta at [email protected]





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