GE Capital’s dividend payment
General Electric (GE) announced that in 4Q17 it didn’t receive a dividend from GE Capital. In the words of Jamie Miller, GE’s chief financial officer and senior vice president, during the 4Q17 earnings call, “We did not receive a dividend from GE Capital in the quarter and this is in line with our prior communications. And we don’t expect to receive a dividend from GE Capital for the foreseeable future.” GE Capital’s non-payment of dividends to its parent could affect GE’s ability to sustain its present quarterly cash dividend levels.
GE’s free cash flows
FCF (free cash flow) is calculated by subtracting capex from a company’s operating cash flows. The balance cash is used to buy back stocks, pay dividends, or reinvest in the business. The above chart shows the severity of GE’s free cash flow issues. For fiscal 2018, the company has guided for $6.0 billion to $7.0 billion in free cash flows. However, there are three major factors that could get in the way of the company’s expectation.
The first issue is the massive pre-tax charge of $9.5 billion and an after-tax charge of $6.2 billion related to GE Capital’s insurance business. The insurance portfolio’s related statutory capital contribution is expected to be $15.0 billion over the next seven years. Secondly, GE has a $31.1 billion hole in terms of underfunded pension liabilities, which are the highest in the S&P 500.
Finally, though the company anticipates a 2018 year-end cash balance of $15.0 billion, it hasn’t talked about its operating cash flows. Its power and oil and gas businesses contribute more than 48% of the company’s revenues. While the oil and gas business seems to have a good outlook, the power scenario still looks vulnerable. The company made it clear during its 4Q17 earnings call that it expects a negative free cash flow in 1Q18.
On the positive side, capital expenditure levels are expected to remain lower than in 2017. GE’s capex has remained range-bound in the last few quarters. However, the falling operating cash flows remain a concern for GE. In a nutshell, the present dividend levels don’t seem to be sustainable.
Investors interested in indirect exposure to industrial companies can consider investing in the Industrial Select Sector SPDR ETF (XLI). General Electric makes up 3.9% of XLI. Boeing (BA) tops the portfolio holding of this ETF with an 8.0% weight. 3M Company (MMM) and Honeywell International (HON) make up 5.7% and 4.9% of XLI’s portfolio, respectively.
In the next article, we’ll go through GE and peers’ forward dividend yield.