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General Electric And Dividend Cuts: A Case Study In Hyperbole

|Includes: The Coca-Cola Company (KO)

Summary

Shares of General Electric are down 42% in price, year to date.

The company has a new CEO who has inherited a real mess.

Hard decisions need to be made and a lot of investors aren't going to be very happy.

But the quickest way to turn a business around is by cutting expenses.

Introduction:

I stumbled across an interesting article on Seeking Alpha, the other day.  While there have been many recent articles about General Electric, lately, this particular article opened up a line of thinking that, frankly, I find to be very odd, in terms of the article’s context and some of the comments that were posted.

The article was titled:  General Electric to Slash Owners’ Income By 50%

Now, if you follow the social media pages or even the evening news, you have to come to the conclusion that American culture is best expressed in the amount of hyperbole, which is defined this way:

“Exaggerated statements or claims which are not intended to be taken literally.”

But, we have taken the concept of “hyperbole” to a new level, where in fact, the exaggerations and claims are intended to be taken literally.

So, my initial thought when reading the title of the article that I’ve mentioned, was “surely the author is using hyperbole in the traditional sense” and cannot possibly be serious.

Well, to quote a line from the movie Airplane, I think the author would respond, “Of course I’m serious and don’t call me Shirley.”

So What’s Your Point, Dave?

When investors purchase stock in a company, they often see themselves as becoming owners of that company.  Reality can be an ugly thing, but when you own 50, 100, 200, or even 500 shares of a given company, you really aren’t an “owner” except in he broadest definition of that term.

While you get to participate in proxy votes of you shares, every year, you are at best, a “silent partner” in the business and as such, your voice in the day to day operations of that business are virtually nonexistent.

You may own a portfolio of 20, 30, 50 different companies and in every case, your ownership of stock in the companies you own, entitles you to very little other than the short term and long term fluctuations in the price of the stock that you own.

If the stock pays a dividend or if he stock falls into the category of being a Dividend Growth company (the dividend increases annually and for at least 5 years in a row) that dividend is not guaranteed by anything. 

Companies can eliminate the dividend completely as did many of the financial stocks in 2008.  The companies can freeze the dividend (take a look at Western Digital or Monsanto).  The companies in your portfolio can cut the dividend (see General Elecric).

There are no guarantees in the stock market, except for the guarantee that stock prices will go up and they will go down. 

There is no guarantee of how much the prices will go up or down over time, but rest assured, the prices of your stocks will go up and they will go down.  Take it to the bank.

Thoughts Expressed in the Comment Stream:

This is where things get a little weird for someone with my thought process.

There were comments made by people who either own General Electric stock (so they have a dog in this hunt) and by people who do not own General Electric stock (they have no dog in the hunt, just an opinion about dogs in general).

Here are some of those comments:

  • How about slashing executive pay until the dividend can be returned to its former level and cut Immelt’s pension by 50% forever.
  • Hopefully the highly compensated management team does the same and slashes their lucrative compensation package.... Lead by example.
  •  Why not cut the salaries of management 50%?
  •  The new General Electric -- kinda like it's the new KMI
  • No bonuses or additional compensation like shares of stock for anyone until the dividend is restored. Management and the BOD are a reflection of poor leadership. Need serious turnover in the BOD.
  • Owners should have done a much better job of voting for Board members over the years
  • "Investing in stocks is not about your dividend. It's not your dividend."  I respectfully disagree with this philosophy. When I purchase a share of a company I am, in effect, now an owner of that company. Therefore, that dividend does belong to me. That does not mean I believe it should not be cut, but yes it is MY dividend. As an owner, you should be following your company and therefore, they dividend cut should not come as surprise, but as a necessary business decision. So I do agree you have nothing to bitch about. 
  • Why would you expect anything better/new from GE leadership? New CEO is a 30 year GE man...2 of the 4 leaders on the stage last Monday were ex-CEO's of the Transportation Division that is now on the chopping block...and GE has long been known for ability to engineer financials. So much for a fresh start...long-term GE people continue to be in charge...it looks like protecting GE "culture" with legacy GE leadership continues to be the most important task within GE. Where customer service and investors rank in the future...is a bit less clear.

These comments, while being of a "venting" nature fail to actually address the real issue facing those who own GE stock.  And that is, the company is really in a pickle.

Let’s Talk About General Electric:

First, I want to say that I do not own General Electric stock in any of my portfolios.  I have recently been considering adding General Electric, but adding it right now is not something on my radar.  I don’t care if the stock goes to $10 a share or back to $30 a share.  Since I don’t own any and don’t plan to jump on board anytime soon.

But in the article, the author point out that General Electric has “slashed owners’ income by 50%.

With dividends not being guaranteed, why would a dividend cut be a surprise?  Why would anyone believe that their stock ownership in General Electric “entitles” them to a guaranteed dividend payment?  And if you have a portfolio of stock where General Electric is a part of that portfolio, how much has your income actually been “slashed” by GE’s decision to cut the dividend in half and therein slash your income by 50%?

In cutting the dividend in half, GE has reduced your income from that one holding by 50%.  But you still have other stocks in your portfolio that have not cut their dividend and are increasing their dividends so shouldn’t you be more concerned about the total portfolio’s income stream from dividends than the income stream from one stock in that portfolio?

I think so.

But Wait, There’s More:

At the beginning of 2017, General Electric was selling in the market at round $30 a share.

Yesterday, General Electric closed at $18.26 a share.

That’s a decline of 42% year to date.

So, if you own General Electric stock, what should be more concerning to you?  Is it the 50% cut in the dividend?  Or is it the 42% decline in price?

Let’s keep some perspective here, folks.  It’s the 42% decline in price that you should be concerned about and not the 50% cut in the dividend.  Let’s dissect this a bit.

General Electric was paying a dividend of .96 a share, annually.  The new dividend will be .48 a share annually and where it goes from here is anyone’s guess.  Now consider this.  

In January, GE closed at $31.69 a share. Today, it closed at $18.26 a share. That's a decline of $13.43 a share. And these people are upset about the dividend cut?

Let's say that GE did not change the dividend and that it still was .96 a share.

It would take you 14 years to collect enough .96 dividends in order to make up for the $13.43 loss in price.

So, explain to me why the focus is on the dividend cut and not the reality of the price decline.

Putting the Dividend Cut Into Perspective:

Here’s the take that Matt Egan, a CNN Money contributor had to say in an article discussing General Electric:

The problem for GE is that it's not making enough money to cover its dividend payments. Free cash flow, which measures how much cash is being generated after investing in the business, has deteriorated for six straight years.

Even after the painful dividend cut, about 85% of GE's estimated free cash flow will go toward dividend payments, according to JPMorgan. That's well above rivals like Honeywell (HON) and United Technologies (UTX) and speaks to the seriousness of the cash crunch.

Final Thoughts:

Sometimes it’s hard to see the forest, because all of the trees keep getting in the way.  GE is a company in need of major overhauling.  It is not a company that you want to be buying as anything other than a speculation, in my opinion.

But to use the GE dividend cut as something that investors should be angry about as owners, because they weren’t “consulted” is just proof of a lack of understanding about investing in the stock market.

Here’s the deal. You can believe that you are an “owner” of the company, but that is almost like believing in unicorns.  You’re not an owner, because you do not participate in any of the day to day operations of the company, nor do you have any say in the financial decisions that the company is going to make, in order to save the business.

There are no guarantees regarding dividend safety.  A company like Coca-Cola (KO) can decide to change their dividend any time they feel like it even after 56 straight years of increasing that dividend annually.

There are no guarantees that the stock you own or the stock you buy is going to appreciate in value.

If you want guarantees?  You really don’t need to be investing in the stock market.