GE's third-quarter earnings report had an earthquake's worth of bad news for investors. Beware the tsunami aftershocks, especially when it comes to the dividend.
The industrial giant missed analysts' quarterly EPS expectations by a mile -- and that's after those forecasts had been heavily curbed. The 40-per-cent-plus shortfall forced General Electric Co. to cut its 2017 guidance to $1.05 to $1.10, laughably distant from an initial call for $1.60 to $1.70 that it reaffirmed as recently as July. That explains why CFO Jeff Bornstein is on his way out mere months after new CEO John Flannery billed him as a partner in his turnaround efforts. You just can't defend that.
It was Mr. Bornstein who tried to assuage investors after GE's cash flow from industrial operating activities came in about $1-billion below expectations in the first quarter . "We expect to see most of this come back over the remainder of the year," he said. It didn't. And no surprise: The stock, already depressed, took another tumble in early trading.
GE was able to push year-to-date cash flow into positive territory in the third quarter, but after nine months, it's at a paltry $1.6-billion, or $1.9-billion if you include a dividend from its energy operations. That puts its 2017 goal of $12-billion to $14-billion way out of reach. It's now targeting about $7-billion for the whole year. And that's a problem.
GE didn't explicitly confirm its commitment to the dividend in its earnings press release, but in the past few weeks it's given only the vague assurance that it remains a "top priority." Management is sure to get lots of questions about it on GE's earnings call. And if they don't get answers then, they'll certainly expect them next month when Mr. Flannery is slated to deliver a more in-depth assessment of the business.
GE needs about $8-billion to fund the dividend at current levels. And it has previously highlighted $1.8-billion in pension funding for this year, as well as $3-billion to $4-billion of capital expenditures. Mr. Flannery has also accelerated efforts to clear out the excesses left behind by predecessor Jeff Immelt. This is necessary, but restructuring costs money. It's not clear how it's going to pay for all this.
For now, GE appears to be reducing its share buyback allocation. It repurchased only $3.7-billion of shares so far this year, well short of its given range of $11-billion to $13-billion. It's aiming to cut $2-billion of costs. That will help to shore up funds somewhat. GE also has the option of tapping the debt market. But these aren't sustainable solutions.
Really, GE needs its businesses to start performing better, which is no easy task given the struggles in its energy and power operations. Its goal of $2 in adjusted EPS by 2018 is a joke, not least of all because it hopefully won't be reporting numbers on that manipulated basis by then. But we don't fully know yet how downtrodden Mr. Flannery thinks the company is. Analysts were targeting $1.62 for 2018 going into Friday, but even that looks optimistic.
Mr. Flannery is likely to reveal his updated outlook in November, along with the results of a portfolio review that could yield divestitures (the transportation unit being one favourite, the energy operations another) or a bigger breakup. GE said on Friday that it's targeting $20-billion-plus of exits over the next one to two years.
The more depressed GE's earnings outlook, the less tenable its dividend. As painful as this garbage dump of an earnings report was, the worst may be yet to come.
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Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.