General Electric Faces Reality

General Electric is not doing well. Their last quarter was a disaster. The company earned 29 cents per share. Wall Street had been expecting 49 cents. At the beginning of the year, shares of GE were around $32. Now they’re at $22.50. In 2000, GE was over $60 per share.

Frankly, I don’t have a strong opinion on GE. (I said recently on CNBC that it could be worth adding if it falls below $20 per share.) But what I find interesting is that Wall Street is thinking that GE will finally lower its quarterly dividend. A few analysts have already said to expect this.

The reason this is so important is…well, that it’s GE! This is the bluest of the blue chips. GE has been a member of the Dow for 121 years. This was the set-and-forget stock. Buying GE was for people who didn’t want to speculate in stocks. Just put your money in good ol’ GE. It’s better than a bank!

Well, now we know how safe the banks were!

To me, it has appeared that GE has been doing all it could to repel lowering its dividend. Now, they have to face reality. The current dividend is 24 cents per share. That works out to a yield of 4.2%. Of course, that assumes the dividend stays at 24 cents.

GE will make about $1.20 per share this year. So the dividend eats up a lot of money that could be reinvested in the business. For comparison, the average S&P 500 company pays out about one-third of their profits as dividends.

There’s an unstated rule about dividends. Once you set a dividend, you’re committed to raising it, or at least, maintaining it. Dividend cuts look very bad. There’s no law which says you must maintain your dividend, but it’s expected — and so much of Wall Street revolves around expectations.

The company did slash its dividend during the financial crisis, but so did tons of other companies. This is different. This a nice reminder than no one is safe. A growing economy, a bull market, low interest rates and a blue chip name still aren’t good enough.

There’s a reason why value investing had such a good track record — people are terrified of going near a troubled name.

Posted by on October 23rd, 2017 at 12:07 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.