General electric trifecta of bad news – general electric company (nyse ge) seeking alpha electricity for beginners


General Electric ( GE) is under pressure again. Like I said in my last article (read General Electric Is Uninvestable), the company is making a lot of noise, and just this week we learned that 1) company may sell its insurance business, 2) Flannery sees no imminent turnaround in the Power segment, and 3) another dividend cut maybe in play. This is all bad news, and these announcements further strengthen my belief that General Electric’s stock remains uninvestable at today’s prices. Insurance Sale

Rumors are swirling that the company has hired bankers to offload its struggling insurance business. If you’ve been following the company closely you know that the division just took a loss of $6.2 billion after the company recalculated future obligations. Instead of trying to turn the business around, management has chosen to get rid of the headache the easy way.

Insurance is not GE’s core business, but selling today doesn’t make much sense either. If we think of the insurance operation as a stock, GE is basically selling at the bottom. Granted, things are bad. However, unlike a public investor, GE controls the business, somanagement has the ability to turn it around. If they sell today, GE would be realizing a huge loss while giving up all potential gains to the buyer. You can bet that whoever is buying a “run-off” business (i.e. declining cash flows) is a savvy private equity or hedge fund that will demand very high returns. Since it is publicly known that GE’s insurance segment is a disaster already, I see the buyer applying even more stringent return requirements for this deal, which will lead to lower prices offered.

Of course, we don’t know for certain what the appetite is for this type of asset yet. But if Genworth Financial ( GNW) (a former GE subsidiary that has already suffered what GE is going through now) is of any indication, no one will be willing to touch it with a 10-foot pole. Genworth is trading at just 16% of its adjusted book value today and there are no buyers except for a little known Chinese conglomerate called Oceanwide.

Power is the largest segment under the GE umbrella with $36 billion of revenue in 2017. Some investors had hoped that the business would rebound, unfortunately this dream was crushed by Flannery as he stated during a conference that he doesn’t expect to see any improvements this year , or the next, or the year after that.

I have an even more pessimistic view as the Power segment shrunk in Q1, with revenue decreasing 9% and segment profit down 38%. Hoping for a big turnaround in the Power business is swimming against the current with renewables becoming more and more prominent every day. GE’s renewable business is still small ($10.3 billion of revenue in 2017), so while it will provide some offset, it won’t be enough to completely eliminate Power’s short fall.

Now that the Power segment isn’t expected to perform very well, I don’t see what big levers GE has left. Power was the one segment that could have surprised. Aviation, Oil and Gas, and Healthcare are all growing, but those segments didn’t have much trouble in the first place. The other segment that could’ve turned around was Transportation. Unfortunately that business was spun out at a cheap valuation as I explained in my previous article. Dividend Cut

In the same conference Flannery also said that he’ll have to see how “this plays out,” when probed by the JPMorgan analyst regarding the $0.48/share dividend in 2019. In the same breath he also stated that the dividend would “ultimately (be) a function of our operating performance with the assets.” This was widely attributed as the cause for the stock’s worst day in nine years.

Even though David Faber stated that “people familiar with the matter” said that GE doesn’t plan to cut its dividend , I fail to see why these people are more trustworthy than Flannery, who is speaking in a public setting. Flannery’s candid response also makes sense to me. For too long GE has been funding its dividend with cash on hand and asset sales as the business itself generated insufficient or even negative free cash flow.