GE’s cash position
At the end of the first quarter, General Electric (GE) had cash in hand of $7.5 billion, down $4.3 billion compared with $11.8 billion at the end of 2017. In Q1 2018, GE’s CFO, Jamie Miller, stated, “there is no change to our 2018 guidance of $6 billion to $7 billion of free cash flow. We expect to end the year with $15 billion in cash, which is driven by the next three quarters of free cash flow, and disposition proceeds while funding the pension and the dividend.”
Obstacles for GE’s free cash flow target
There are a couple of obstacles in the way of General Electric achieving its 2018 free cash flow target. The first is the $6.2 billion after-tax charge associated with GE Capital’s insurance business. The insurance portfolio’s related statutory capital contribution is expected to be $15.0 billion to be funded over the next seven years. The second factor is GE’s huge pension liabilities. The industrial behemoth has a $31.1 billion in underfunded pension liabilities, the highest among S&P 500 companies.
The company shifted its reporting pattern to free cash flow from operating cash flow in Q1 2018. The market is aware of the weakness of GE’s Industrial’s free cash flows. What bothers investors is while CFO Jamie Miller states that the company shifted reporting from CFOA (cash flow from operating activity) to free cash flow (or FCF), CEO John Flannery outlines FCF as a function of operating cash flow.
Wall Street analysts expect GE’s operating cash flow in the $7.0 billion to $8.0 billion range in 2018. This is down 33% on a YoY (year-over-year) basis from $10.4 billion in 2017. On the positive side, capex levels are expected to remain lower than last year. With the negative free cash flow of $527.0 million in Q1 2018, the coming quarters will be crucial in achieving its free cash flow target.
General Electric makes up 3.4% of the iShares U.S. Industrials ETF (IYJ). Apart from GE, other big industrial companies in IYJ’s portfolio include Boeing (BA) with a 5.8% weight, 3M Company (MMM) with a 3.5% weight, and Honeywell International (HON) with a 3.3% weight.
In the next section, we’ll discuss GE and peers’ forward dividend yield.