General Electric’s focus on 2018
In General Electric’s (GE) investor update on November 13, 2017, CEO John Flannery said, “for 2018, a couple of thoughts here. The first headline I’d say is prudent fiscal policy as we go through the reset. So strong cash position, again, balanced capital allocation inside the business. We’re going to continue to invest in R&D. We think our capital expenditure and investing should be coming down as some of these product launches mature and a payout of $0.48 a share on the dividend.”
Free cash flows
Free cash flow is derived by deducting capital expenditure from a company’s operating cash flows. The residual cash is used to pay dividends, stock buybacks, or reinvest in the business. In the above chart, you can see that General Electric’s free cash flows have fallen significantly in the last few years.
Digging into General Electric’s industrial OCF (operating cash flow), the company’s OFS was $465.0 million in 3Q17. The OCF was $7.6 billion in the same period last year. The OCF has fallen significantly in the past year.
In addition, General Electric announced that it won’t receive dividends from GE Capital in 2018. It will pull down the OCF in the industrial business. Although the capex has remained range bound in the last few quarters, regaining the lost levels of OCF and free cash flows remain a concern for General Electric.
Rating downgrade by Fitch
Recently, rating agency Fitch downgraded General Electric’s long and short-term issuer default ratings to “A+” and “F1” from “AA-” and “F1+.” Fitch has a negative rating outlook for General Electric. The company has been engaged in restructuring for the past few quarters. It’s expected to intensify in the coming quarters. However, the successful execution of numerous cost curtailing actions is a risk for General Electric.
The 50% cut in dividends provided some impetus to the company’s free cash flows. However, there’s uncertainty about General Electric’s ability to generate a substantial OCF.
General Electric accounts for 0.67% of the SPDR S&P 500 ETF (SPY). The other industrial majors included in SPY are Berkshire Hathaway (BRK-B) at 1.67%, Boeing (BA) at 0.69%, 3M Company (MMM) at 0.63%, and IBM (IBM) at 0.59%.
Next, we’ll discuss the forward dividend yield for General Electric and its peer group.