Are GE’s Cash Flows from Industrial Operations a Concern?
2Q17 cash flows
General Electric’s (GE) industrial cash flow from operating activities (or CFOA) has been a matter of concern recently. On a GAAP (generally accepted accounting principles) basis, GE’s cash from continuing operating activities was $3.6 billion in 1H17 and $10.7 billion in 1H16.
If we adjust for dividends for GE Capital, its industrial CFOA was -$431.0 million in 1H17, a fall of $233.0 million compared to 1H16. On a non-GAAP basis, its industrial CFOA was -$163.0 million in 1H17, excluding deal tax and GE’s pension plan funding. This amount was roughly $600.0 million lower than its 1H16 level.
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Behind the fall in CFOA
On GE’s 2Q17 conference call, CEO Jeff Immelt said, “We expect to hit $16 billion to $20 billion of free cash flow plus dispositions. We still expect to have solid Industrial CFOA between the $12 billion to $14 billion. Again, somewhat dependent on the resource sector. Our dispositions are taking longer than expected, but we hope to close both in the year. I expect John to take a fresh look at capital allocation, but GE will always have a strong commitment to the dividend.”
In 1Q17, GE Aviation had a couple of dues running into the hundreds of millions of dollars. Though the company was hopeful of clearing these dues in 2Q17, the industrial CFOA numbers suggest that General Electric still hasn’t done so. Huge dues in the Power segment in the Middle East also seem to be outstanding.
Market Realist feels that GE’s problem lies in its working capital management. What was supposed to be realized in 2Q17 hasn’t been. With only six months remaining in 2017, the pressure on GE to achieve its 2017 industrial CFOA target of $12.0 billion–$14.0 billion in 2H17 has increased tremendously. The company’s target for 1H17 was $3.9 billion.
As we discussed in GE’s 1Q17 post-earnings series, the company’s future dividend growth will remain in shambles if its 2017 industrial CFOA numbers aren’t met.
GE is included in the portfolio holdings of the Industrial Select Sector SPDR ETF (XLI). This ETF also has exposure to some of GE’s close peers such as Honeywell International (HON) and 3M Company (MMM) and some of its customers such as Union Pacific (UNP).
We’ll wind up this 2Q17 post-earnings series on GE by taking a look at analysts’ opinions on its stock.