I tend to like companies that others hate… especially if there is a reason to expect a turnaround. Wall Street is reactionary – meaning analysts don’t upgrade stocks or start getting bullish until after things improve. I am more proactive and seek opportunities to get into cheap stocks with great dividends… before the rebound. General Electric (NYSE: GE) was a company that I thought would fit the bill. Its business has struggled over recent years.
Revenue is down 31% from 10 years ago, and net income has plummeted 65%.
With a dividend yield of 4.7% and its leadership in aircraft engines and other industries that would benefit from a boost in infrastructure spending, GE seemed like a good turnaround candidate – until I dug into the numbers.
GE is in trouble.
Free cash flow was negative in 2016. This year free cash flow is forecast by Bloomberg to be $10 billion. It will likely pay out $9 billion in dividends. That’s a 90% payout ratio for a company whose results are slipping. That’s too high…
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When the Going Gets Tough – Cut the Dividend
General Electric is not afraid to cut its dividend when times get tough.
In 2009, GE slashed its annual dividend from $1.24 per share to $0.40. Today, the dividend is $0.96 per year, so it still hasn’t come all the way back to pre-2009 levels.
Many on Wall Street expect GE to reduce its dividend soon. When asked directly about it on the company’s earnings call, CEO John Flannery refused to discuss dividend plans other than to mention the company will release more details in November.
I don’t often agree with Wall Street, but in this case I do. A dividend cut is likely. GE doesn’t have the cash flow to sustain its dividend and has shown a willingness to lower it in the past.
GE investors should expect a lower dividend in the near future.
Dividend Safety Rating: F
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Good investing,
Marc