GE: Don't Scoop Up Shares Just Yet

David Eller profile picture
David Eller


  • Jeff Immelt Unofficially Talked Down Guidance Yesterday At The EPG Conference.
  • Tougher Markets Were The Cause Despite An Improving Global Economy.
  • Sell Side Analysts See More Bad News To Come.

GE isn't a growth stock. Since the peak in 2007, the stock price is down 35% and in this 10 year period, the average revenue growth has been -2.75%. Clearly, long term investors are in for the yield and there are indications that it may be in jeopardy.

Yesterday, General Electric's (NYSE:GE) Jeff Immelt, addressed investors at the EPG conference in Florida, one of only two times he speaks to investors publicly each year. This year he dropped a bombshell. I'll paraphrase his speech with an edited version of the transcript.

I don't think we do you any favors unless we underwrite 2018 assuming resource markets are stable. If you do that as your underwriting case $2 should be at the high end of the range and our job now is to take more cost out...we do think the digital spend as a buffer as markets potentially get worse, that's how we think about the company going forward.

Full transcript here

The EPG comments are a great concern for two reasons:

  1. Because negative earnings revisions flow through to the dividend over time and threats to this stream of cash flows will directly increase selling pressure.
  2. GE's CEO has stated that the company is less likely to meet the financial hurdles that it has set for itself, not hurdles set by external analysts. This type of revision can signify an inflection point in profitability.

Despite the attractive 3.5% yield the financials are stretched to pay this amount. Since 2012, the dividend payout ratio rose from ~50% to over 100% (data from to Morningstar). The American Association of Individual Investors suggests that a payout ratio of over 50% is a warning sign but simple math tells you that a payout ratio of over 100% of earnings simply isn't sustainable and while the payout ratio improved from 2015 to 2016, it remains

This article was written by

David Eller profile picture
Reformed Wall Street analyst sharing ideas

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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