GE eyes $20bn of asset sales in profitability bid
General Electric (GE) will radically shrink to focus on aviation, power and healthcare, making a bet on sectors where it thinks it can make profits, as the most famous US conglomerate tries to revive its share price after a decade and a half of stagnation.
The 125-year-old company cut its dividend and profit outlook in half as it goes through the transition, in a widely-expected plan unveiled by new chief executive John Flannery in New York yesterday.
Shares fell 3.6pc in early trading to $19.72 as investors worried how the slimmed-down company would generate cash to justify its stock valuation.
"By the numbers, we see a core operating performance that is below plan, and, currently, a consensus expectations curve that we think remains too high," said JPMorgan analyst Stephen Tusa.
General Electric (GE) stock is the worst performing Dow component this year, down 35pc by last Friday's close. Since September 2001 - when recently retired CEO Jeff Immelt took over - GE stock has effectively been dead money, posting a negative total return even after reinvesting its juicy dividends.
Mr Flannery, who took over as CEO on August 1, said he will focus on "restoring the oxygen of cash and earnings to the company".
The refocusing of the company likely means the sale of $20bn of assets. GE will jettison businesses with "a very dispassionate eye", Mr Flannery said.
That could mean exiting businesses like lighting, transportation and oil and gas, and GE could reduce its manufacturing "footprint" of factories around the globe, analysts said.
The dividend cut, only the third in the company's 125-year history and the first not in a broader financial crisis, is expected to save about $4bn in cash a year.
"This cut was mostly priced into the stock and should not come as a major surprise," said RBC Capital Markets analyst Deane Dray. "That said, we still anticipate that this dividend cut will be a major disappointment to GE's (roughly 40pc) retail shareholder base."
GE forecast adjusted 2018 industrial free cash flow of $6bn to $7bn, up from an estimated $3bn in 2017.
The move to make GE smaller and nimbler is a turnaround from the previous multi-business approach taken by former CEOs Jack Welch and Jeff Immelt.
Mr Flannery's changes repudiate much of Immelt's vision of a "digital industrial" company that builds software to manage and optimize GE's jet engines, power plants, locomotives and other products.
Conglomerates have long been out of favor on Wall Street, where investors prefer to bet on specific industries rather than a mixed portfolio. (Bloomberg)