- General Electric (GE) has slashed its dividend in half.
- Analysts see move as a way to rescue GE’s flagging stock price
- GE was one of the biggest dividend-paying companies in the U.S., distributing about $8 billion in profits annually
General Electric, one of the nation’s biggest industrial companies, announced Monday it will slash its dividend payment in half to $0.12 from $0.24 per share.
Faced with slowing cash flow and a falling stock price, John Flannery, the company’s new chief executive, is hoping to boost the company’s prospects by plowing cash back into operations and focusing on fewer business units, according to industry experts.
This is only the third time in the company’s 125-year history that it has cut its dividend, according to Reuters. It also did so at the height of the Great Depression, and during the financial crisis of 2008 and 2009.
Why do companies cut their dividends?
Until recently, GE had been one of the biggest dividend payers in the U.S., distributing about $8 billion a year in cash annually to its shareholders, according to the Wall Street Journal.
Companies tend to cut their dividends, which are a share of profits distributed to shareholders typically on a quarterly or an annual basis, when their earnings decline or their cash flow isn’t sufficient to fund the dividend payment.
Companies tend to cut their dividends…when their earnings decline or their cash flow isn’t sufficient to fund the dividend payment.
Going forward, GE may now take money it had used to pay a dividend and plow it back into the company. Plowing cash back into operations has proven an effective strategy for other public companies in recent years, experts say.
Weak earnings and falling stock price
GE, one of the largest companies in the U.S. with 300,000 employees, is a sprawling conglomerate. Its numerous business lines include the manufacture of aircraft engines, equipment for oil and gas mining, and diagnostic imaging systems for the healthcare industry, as well as home appliance manufacturing, not to mention consumer finance.
GE reported weaker than expected earnings in the third quarter, with particularly soft performance in its power generation and oil and gas segments, which both posted losses, according to reports.
The company also said cash flow to fund operations for the year would be about $7 billion, roughly half earlier estimates of $12 to $14 billion, according to the New York Times.
The last remaining original component of the Dow Jones Industrial Average, and once one of the most admired companies globally, its stock price has fallen about 35% in 2017.
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Good news for GE, bad for investors?
Investors had been expecting GE to lower dividends — but it doesn’t mean they’re happy about it. The stock fell about 8% on Monday, following the announcement.
GE said it is cutting its dividend to align with a “revised capital allocation” program, which includes concentrating the business on three main units–aviation, power and health care.
“We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation,” John Flannery, GE’s chairman and chief executive said in a statement.