General Electric is set to report its third-quarter earnings five days later than expected, and investors are bracing for more negative updates, especially regarding the company’s quarterly dividend.
GE cut the dividend in half last November, and many analysts on Wall Street expect newly appointed CEO Larry Culp to cut the dividend again as GE struggles to turn its balance sheet around. GE’s board named Culp chairman and CEO on Oct. 1, and the dividend, currently paying out at 12 cents a share, is considered top among Culp’s priorities.
Culp is coming into GE with a track record of success as the CEO of Danaher but his previous “situation could not have been more different to this,” J.P. Morgan’s Stephen Tusa said earlier this month.
“The reset itself, and how potentially bad it actually is, is still in front of [GE management], including a likely dividend cut and potential equity raise,” Tusa said.
GE shares enjoyed a 16 percent rally the week of Culp’s appointment and rose as high as $13.78 a share in trading on Oct. 9. But the stock has since sold off and is nearly flat this month, closing Friday trading at $11.30 a share.
While investors heralded Culp’s ascension, those on Wall Street say GE is not out of the woods.
“At a minimum, we heard loud and clear from investors that a large, if not total, dividend cut is widely expected,” UBS analyst Steven Winoker said in an Oct. 16 note.
Winoker has a neutral rating on GE with a $13-a-share price target. Both Tusa and Gordon Haskett’s John Inch have sell ratings on GE, with price targets of $10 a share and $11 a share, respectively.
“Investors appear to broadly expect a dividend cut. Given GE’s grim cash backdrop, the bigger the cut the better, in our opinion,” Inch said in an Oct. 24 note. The analyst said in a new note Monday there’s a chance the dividend cut may not be announced formally on Tuesday but at a later time.
But a dividend cut risks further upsetting the stock’s large retail ownership base. Inch estimates retail investors make up as much as a third of GE’s total shareholders. His firm’s survey of GE investors found retail shareholders “expect just a modest dividend cut by roughly” 10 percent, Inch said.
“GE’s challenges may ultimately prove too great even for Larry Culp,” Inch said. “We have the utmost respect for Larry Culp’s laudable skill sets. However, his professional track record would not appear to be wholly aligned with the task of working out GE’s long list of problems including liquidity issues.”
Even with Culp approaching GE’s troubles as an outsider, “a lot of the same problem remains,” Morningstar’s Josh Aguilar told CNBC. Aguilar has an overweight rating on GE, with a price target of $16 a share.
GE’s board ousted John Flannery as CEO after 13 months on the job, having grown frustrated with his slow pace of change. This quarter will be the first time shareholders get a look at what Culp brings to GE, beyond accelerating Flannery’s promise of trimming GE down to three core businesses.
“Even with the previous plan that they had, the aggregate dividend was never going to be safe,” Aguilar said.
Shortly after Culp’s appointment, S&P Global Ratings downgraded GE’s credit rating to BBB+ from A. Moody’s also placed GE’s credit rating under review, saying the company’s worse-than-expected full-year earnings and free cash flow prompted a review. GE announced on Oct. 1 the company would take a $23 billion noncash charge for its ailing power business and said it will “fall short of previously indicated guidance for free cash flow and EPS for 2018.”