Patience may pay off for General Electric traders

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Many analysts expect General Electric (GE) to exceed their profit expectations when they post their third quarter earnings report on October 20, as it has done in eight of the last nine quarters. However, there is also a high expectation that its share price will fall as it has done for the past seven quarters after earnings results are released. 

Fears over a dividend cut have eased since last week – which would have led to an investor exodus and a serious drop in share value – but there still seems to be a lot of work to do for recently appointed CEO John Flannery who is overseeing restructuring and reorganising efforts. 

“A dividend cut could crush the stock as retail investors flee, but maintaining it gives GE little or no excess cash to grow,” Jeffrey Sprague, an analyst at Vertical Research Partners, said last week. “GE has continued to shrink the company but it has not proportionally shrunk the dividend.” 

Moody’s Investors Service credit analyst Rene Lipsch told Reuters that GE’s options would narrow next year when it no longer receives billions from asset sales at GE Capital. Adding that, long term, the dividend “depends on Flannery’s ability to increase cash flow from the businesses.” 

Flannery’s appointment has been followed by the announcements that its CFO was leaving the company along with news that two vice chairs were retiring which have been taken as a bad sign by analysts. 

JPMorgan are one that hasn’t been impressed by the new appointments or restructuring at GE. 

Analyst Stephen Tusa Jr. sees a dividend cut as “increasingly likely” and lowered his price target by $2 to $20. 

“We view the early exits of key execs as a signal that is negative,” Tusa wrote. “With our most recent cut to earnings, some of which is cash, and updated thoughts on the markets, we now see a dividend cut, or ‘adjustment,’ as it is likely termed, as increasingly likely.” 

 

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