On November 13, GE (NYSE: GE) Chairman and CEO John Flannery hosted an investor update to provide a state of the company and to outline GE’s 2018 strategy. He shared updated targets for 2018, including:
- Adjusted EPS $1.00–1.07
- Industrial free cash flow $6-7B
- Dividend payout $.48
Here are the 4 top takeaways from the meeting (listen to a replay here):
1. GE has strong businesses. The company needs to run them better and focus its portfolio on businesses where it has a strategic advantage.
GE’s franchises are fundamentally strong. 85% of its industrial profit comes from businesses with leading positions in complex industries that require scale and technical depth, such as power, flight, and health. GE leverages technology across its businesses, like turbine technology is used in both power and aviation.
But the company needs to run its businesses better. To this end, GE is focused on improving cash, metrics, cost, and capital allocation to unlock more value.
GE also needs to focus its portfolio into businesses where it has a strategic advantage. GE will invest in areas that play to its unique strengths, and plans to exit more than $20 billion of non-core or smaller businesses, including the pending sale of Industrial Solutions and the proposed sale of Lighting. The company also announced it is exploring strategic options around the proposed sales of its Transportation and Current businesses, along with ten smaller transactions.
Digital remains essential to GE’s strategy, and the company will concentrate resources on a core set of Predix Applications like APM, OPM and Service Max. GE will focus platform spend on its most differentiated aspects – edge to cloud and digital twin.
2. GE is increasing its capital allocation discipline, including lowering its dividend.
To strengthen the company, GE needs to improve its cash position for the long-term. It is focused on management for total shareholder return by balancing an aggressive focus on costs with critical investments in long-term growth initiatives, like investing in R&D.
GE is reducing its dividend payout to be more aligned with the generation of free cash flow. Given GE’s 2018 outlook highlighted in the presentation, the Board decided to lower the dividend to $.48, which is a 60-70% payout ratio on 2018 estimated free cash flow of $6-7B.
3. GE is shifting how it measures itself and incentivizes its senior leaders.
The company is also improving its financial reporting by adopting new metrics to make it easier to interpret connections between earnings, growth and cash flow. GE’s performance metrics have historically prioritized top line growth and operating profit, and going forward, the company will increase its focus on cash. GE will use several new metrics beginning in 2018 that are consistent with its industrial peers, including:
Moving from industrial CFOA to industrial free cash flow
- Moving from industrial operating + verticals EPS to adjusted EPS
GE is highly focused on driving a culture of candor, rigor, and accountability. This change starts at the top, and to better align management with shareowners, GE is shifting executive compensation to a higher equity mix.
4. Changes to leadership and governance will improve GE’s accountability going forward.
GE has made significant changes to its leadership team. Since June, 40% of the GE leadership team are in new roles, blending together both fresh eyes and institutional memory.
After completing a self-assessment, GE’s board decided to reduce the number of directors to 12 from 18, and three of these directors will be new to the team. It is also adding a new Finance and Capital Allocation committee. Board incentives will be tied to performance via increased stock ownership.
The GE of the future will be a highly-focused industrial company with unmatched global scale and strength in technology, services, additive and digital. GE has the technical expertise, global reach and installed base, and built-for-the-future capabilities to succeed in these markets as it continues to tackle the world’s biggest challenges – the essentials of modern life.
Disclosure: This post was written by the communications team at GE. For more about this announcement and for other GE news, go to GEReports.com