The last time General Electric stock was this cheap, investors were wondering whether the conglomerate’s lending business could survive a financial crisis with a chokehold on its primary source of funds.
The company responded to the early 2009 threat with a dividend cut that prompted small investors to flee in droves. Since then, a series of chief executive officers have worked to streamline the manufacturer that Thomas Edison founded in the late 19th century, in part by selling most of the lending operation.
Jeffrey Immelt, who led GE from 2001 through 2017, also exited businesses in which GE was a household name — including home appliances and NBC — and refocused the Boston-based company on its manufacturing roots with acquisitions including Alstom’s electrical-grid operations.
While Immelt managed to drive the stock up to about five times its 2009 low and rebuild the dividend from a penny a quarter to 24 cents, the $10 billion Alstom deal proved to be poorly timed, made on the cusp of a decline in energy markets that would leave the company unable to meet profit and cash-generation targets and figure prominently in criticism that preceded Immelt’s departure in 2017.
It’s a challenge that has prompted Boston-based GE to cut its quarterly dividend in October for the second time in less than a year, all the way back to a penny per share, raised questions about its over-extended balance sheet and dragged its stock to $7.99 on Monday. The upbeat, if vague, comments from CEO Larry Culp — the third person to head the company in about a year — in a lengthy interview with financial channel CNBC did little to soothe investors’ worries.
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“Clearly, the stock has been under pressure; there’s no doubt about that, ” Culp told the channel’s David Faber on Monday, blaming the decline on the dividend cut and GE’s warning that it would miss full-year cash flow and profit targets.
Even with the way “the stock’s trading, I think we’d make those same decisions today, because those were the right decisions to make sure the company is facing forward in dealing with the fact that we do have a lot of leverage,” said Culp, who has overseen a 29 percent drop in GE’s stock since taking over at the beginning of October. “We all agree in that regard.”
GE maintains healthy liquidity, he said, with $26.7 billion of cash at the end of September, savings of $3.9 billion a year from the dividend cut and $40 billion in credit lines.
Still, “we need to bring the leverage down,” he conceded, and planned sales of businesses will help achieve that. “It’s important to strengthen the balance sheet. It’s important for our investors, for the ratings agencies, for the investors, for everybody with an interest in the company.”
Culp, the former CEO of Danaher, was appointed to GE’s top job at the start of October, replacing John Flannery, who presided over a 54 percent drop in the company’s stock during a little more than a year at the helm after Immelt’s departure. He left at the end of the third quarter, a period in which GE posted a loss of $22.9 billion, largely due to a $22 billion writedown in the power unit. Both the Securities and Exchange Commission and the Department of Justice are reviewing the charge.
Net debt from the company’s manufacturing businesses may be about 4.5 times their earnings by year’s end, said Stephen Tusa of New York-based JPMorgan Chase, and debt-ratings firm Standard & Poor’s lowered the firm’s score in October from A to BBB+, three levels above junk, making it more expensive to borrow money.
“Earnings still are far from reset, as we still see structural concerns in the key power markets, minimal margin for error on leverage, and numerous tail liabilities at both GE” and its lending business, Tusa said in a note to clients. He predicts the stock will sink to about $6 over the next 12 months.
Still, GE’s customers remain loyal and want to do what they can to help while employees have “grit and resilience to fight,” Culp said Monday. “I know, having looked at this company for a long time, that GE is important. What we do in terms of aviation, health care and energy is important. This company matters to the U.S.”
