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Is GE Planning a Dividend Payment out of Capital Receipts?

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Apr. 17 2018, Published 2:24 p.m. ET

GE Capital—a new ailment?

There was a time when GE Capital paid dividends to General Electric (GE). These dividends, in turn, acted as a support for the parent company’s quarterly cash dividend payments to its common stock owners.

After some significant disclosures, GE took a $6.2 billion hit in GE Capital’s insurance portfolio. GE also declared that it would inject $15.0 billion into the Capital business’s reserves over the next seven years.

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The picture related to GE Capital became clearer on April 12, 2018. On the day, Bank of America Merrill Lynch stated, “GE Capital has zero equity value.” Analysts believed that the current Securities and Exchange Commission and US Justice Department investigations could cost GE Capital billions of dollars in terms of legal settlements.

Cash generation through restructuring

In early April 2018, General Electric announced the sale of its healthcare IT (information technology) business for $1.1 billion in cash. Investors may wonder why GE wants to sell parts of its cash cow Healthcare segment. The answer is simple: to improve its cash flow statement. In the company’s November 2017 investor update, CEO John Flannery vowed to divest GE’s noncore businesses. This sale was seen as the first step toward that goal.

In addition, the Wall Street Journal released a report on April 12, 2018, saying that GE might consider the spin-off of its Transportation segment, which is worth $7.0 billion. The company may come out with an initial public offering to raise cash from the investor community.

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Our analysis

Market Realist views both of these events as attempts by the company’s management to fund its quarterly cash dividend, which at current amounts to over $1.0 billion. On an annualized basis, the company’s cash dividend amounts to $4.0 billion.

Should the company fund its regular quarterly dividend payments with the cash generated from its asset and business sales? It’s as good as funding revenue payments with capital nature gains and receipts. This appears to be a short-term solution for its dividend payments.

ETF investment

General Electric makes up 5.1% of the portfolio holdings of the Industrial Select Sector SPDR ETF (XLI). Investors who prefer indirect exposure to industrial stocks can consider investing in XLI. Industrial giants Boeing (BA), 3M Company (MMM), and Honeywell International (HON) make up 7.9%, 5.6%, and 4.8% of the ETF’s holdings, respectively.

We aren’t the only ones with doubts about GE’s ability to sustain its trimmed quarterly cash dividends in the near future. Apart from JPMorgan’s Stephen Tusa, Gautam Khanna of Cowen has also jumped into the fray. We’ll check out analysts’ opinions on GE stock in the final part of this series.

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