Knowing how much patience to exercise with an underperforming holding is one of the hardest (and often most humbling) challenges in investing, in my opinion. As a long-term dividend growth investor, when I purchase shares of a company, I hope to hold my ownership stake forever and keep portfolio turnover as low as possible.
Of course, that doesn’t always happen. The world is always changing, upending investment theses and changing the market’s winners and losers.
There are two primary reasons why I will sell a holding: (1) I believe the company’s long-term outlook has permanently changed for the worse; (2) the company’s dividend is at real risk of being cut, which jeopardizes my income stream and potentially my ability to preserve capital.
These judgment calls are not always clear given the wide range of variables impacting a company at any given time. Unfortunately, General Electric (GE) is the latest example.
While I still believe General Electric has a promising 3- to 5-year outlook and is not a business that is rotten to the core, the company’s latest earnings release provided clarity that GE’s dividend will almost certainly be cut in November.
This past Friday, General Electric slashed its 2017 earnings per share guidance by 35%, lowering its target from a range of $1.60 – $1.70 to $1.05 – $1.10 (compared to annual dividends of $0.96 per share).
Most of the company’s segments actually performed well, but those gains were more than offset by weakness in GE’s power generation segment and continued softness in oil and gas markets.
The company’s estimate for 2017 industrial cash flow also decreased significantly from earlier guidance of at least $12 billion to just $7 billion, driven by lower volumes in power, oil & gas, and renewables.
Higher inventory, increased working capital levels, one-time tax costs, and cash restructuring spending further reduced GE’s industrial cash flow estimate.
Source: General Electric Investor Presentation
Analysts and investors were already expecting pretty bad news this quarter, reducing estimates and driving GE’s stock price down by more than 25% year-to-date. However, management’s earnings and cash flow update was worse than even the lowest analyst estimate.
As a result, GE’s stock dropped by as much as 7% in early trading on Friday, although it recovered throughout the day to end with a modest gain.
Investor uncertainty remains high, as demonstrated by GE’s latest pullback today, as investors continue speculating about the company’s new strategic plans, updated capital allocation framework, and 2018 guidance that will be revealed by GE’s new CEO John Flannery on November 13th.
While we will know a lot more in November, as far as income investors are concerned, General Electric’s report last week did not provide good news about the company’s future dividend.
What Friday’s Report Means for GE’s Dividend
