Ask ten different investors to describe the current health and outlook of industrial giant General Electric Company (NYSE:GE), and odds are good you’ll get ten mostly different assessments. Part of that is because the company posts several different operational metrics every quarter, and part of that is just because GE stock has been a little fuzzy of late about what it’s trying to do, and how it’s doing it.
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The proverbial bearish thesis on GE stock became a slam dunk case, however, when General Electric responded to Inch’s number-crunching. An official statement from the company read:
“The Deutsche Bank alert is totally wrong — the analysis is faulty. The GE dividend is safe. We will generate $12-14B of cash flow from operations this year and we have $8 billion in cash on our balance sheet as of the end of first quarter. In addition, we just did an investor presentation at EPG where Jeff outlined that we will buy $11-13 billion in stock back this year and we have $8-12 billion unallocated cash in our framework. We clearly stated that the dividend remains a priority – we would prioritize the dividend over buyback.”
It’s proof that sometimes the best thing a company can say is nothing at all.
General Electric forecasted it would produce between $12 billion and $14 billion in cash flow this year, but that’s essentially what John Inch said with his estimated figure of $13 billion worth of cash flow this year and $14 billion next year. There’s nothing ‘wrong’ in that.
That wasn’t the red flag in the official corporate comments though. It was the wording of the response to Inch’s numbers that are so alarming.
In simplest terms, GE conceded — albeit loosely — it’s eyeing its cash balance for the purpose of paying its dividend. It also conceded that, if forced to make a choice, it would prioritize dividends over the $11 billion to $13 billion buyback of GE stock.
The question is, isn’t the per-share earnings target at least partially predicated on the stock buyback reducing the number of outstanding shares (because the current earnings trajectory just isn’t going to reach the levels they need to)? The follow-up question: After several years of restructuring, shouldn’t the company be past the point where it dips into the till to pay dividends rather than pay them from operations? The idea arguably shouldn’t even be on GE’s radar.
Bottom Line for GE Stock
Never say never. General Electric may well be able to muster some sort of miracle and earn its way out of trouble. Realistically speaking though, there’s nothing on the near-term radar to suggest the next twelve months are going to be radically different than the past twelve months have been. A deal to sell $5.8 billion worth of goods in Vietnam, even if replicated elsewhere, will take time to bear fruit.
If we’re being brutally honest about GE stock and its dividends, John Inch’s doubts actually make a lot of sense.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.