Down more than 6% earlier following a Q3 earnings miss, and a big cut in guidance, General Electric (NYSE:GE) has moved modestly into the green on the session.
This just in: Markets anticipate, and GE was down 25% for the year prior to this morning's clunker. Also just in: New CEOs like to "kitchen sink" their initial earnings reports so as to make the numbers following implementation of their "turnaround" plans look that much better.
The move in GE has boosted the Dow (DIA +0.6%) in a big way, with that average now higher by 150 points.
General Electric’s (GE -1.1%) weak Q3 results and substantial cut to earnings expectations (I, II) indicate the "correct action" would be lowering the dividend, says Morgan Stanley analyst Nigel Coe.
Deutsche Bank's John Inch says GE "falls well short" of generating enough cash to pay its $8B common dividend from operations, which suggests that a "sizable dividend cut is pending," and the stock at 22x P/E now looks "that much more expensive"; the firm rates GE a Sell rating with a $21 price target.
A dividend cut is increasingly likely, and weak results look to continue in Q4 with ongoing challenges in GE's power and oil and gas divisions, says Stifel's Robert McCarthy.
Melius Research's Scott Davis reiterates a Buy rating and $35 price target on the stock, but says he is "downright angry at retired CEO Jeff Immelt and the GE Board. They bled this company and harmed its brand over 16 years. If it’s even remotely true that Immelt had a spare airplane following him around 'just in case,' [it] should be investigated as corporate theft with remuneration made back to shareholders. Let’s hope it’s not."
Perhaps the biggest shock from GE's (GE -2.4%) "unacceptable" Q3 results is the new projection for $7B in cash flow from operating activities, a steep drop from the company's previous view of $12B-$14B.
Cash flow for 2017 is "horrible," CEO John Flannery tells CNBC, but it's "not the new normal - $7B is not the new normal. There are a number of steps we are going to take significantly in 2018."
The drop in cash flow has raised persistent questions about how GE will fund its dividend, pensions and capital investments; while current cash flow projections may not become the norm, Flannery says GE is looking to balance investing in growth and paying the dividend, adding that investors should think of 2018 as a “reset year.”
Q3 operating cash flow was $1.7B, excluding deal taxes and pension plan funding; GE’s liquidity came under scrutiny after the company reported negative $1.6B in industrial operating cash flow in Q1, then rebounding modestly in Q2.
New General Electric (GE -2.8%) Chairman and CEO John Flannery will never have more "political capital" to cut the dividend than now, Harbor Advisory's Jack De Gan tells CNBC following the company's huge earnings miss.
"Clearly a dividend cut would free up a lot of flexibility for John Flannery to execute his restructuring; $8B a year in dividends is a big burden," De Gan tells Squawk Box. "It would upset the shareholder base, and the stock would be dead money for while. [But] this is when he should do it."
At a price of ~$22.75/share and a current annual dividend of $0.96, GE's dividend yield is now 4.19%, its highest in 30 years not including the 2008 financial crisis.
In its earnings call, GE says a final decision on the dividend would be announced at its investors day meeting, scheduled for Nov. 13.
New General Electric (GE -0.3%) CEO John Flannery is expected next month to unveil the results of a strategic review that includes thousands of corporate-level job cuts and scaling back of GE’s global structure, WSJ reports.
Flannery also reportedly will shut research centers in Shanghai, Munich and Rio de Janeiro, shifting some of their engineering work into individual business units, a retrenchment that will leave GE - which spent more than $5B on R&D last year - with just two global research sites, located in Niskayuna, N.Y., and Bangalore, India.
GE is under intense pressure to cut costs and end a stock price decline that has erased nearly $80B in value; on the other hand, some of the restructuring moves could suggest to some that the company is in worse shape than previously thought.
General Electric (GE +0.1%) shares should continue to drift lower but a "myriad of potential moves" from the company are forthcoming, possibly including exiting Baker Hughes (BHGE +1.2%) through a share exchange and selling the transportation unit for a combined $30B-$35B, J.P. Morgan analyst Stephen Tusa speculates.
Among other possible outcomes include raising $8B of debt for pension funding, undertaking a restructuring to save $2B-$3B, and/or cutting the dividend to $0.60/share from the current $0.96 which would free up $3B in additional available cash flow per year, Tusa says, adding that potential actions will begin to clarify this Friday with GE's earnings report.
The GE bear, who said a week ago that a dividend cut looked "extremely likely," keeps an Underweight rating on the shares with a $20 price target.
Add Goldman Sachs' Joe Ritchie to the list of analysts who expect General Electric (GE -0.8%) to cut its dividend; J.P. Morgan's Stephen Tusa said last week that a cut is "increasingly likely."
"We see no quick fix to GE's problems as years of financial engineering, complex reporting and mis-aligned incentives are coming to bear," Ritchie writes as he cuts its 12-month stock price target to $23 from $26 and takes the unusual step of recommending clients buy put options on GE that will increase in value if the shares continue to drop.
Goldman says the options market is pricing in a cut of GE's annual dividend to $0.78/share in 2018 from the current $0.96 payout.
Ritchie believes new CEO John Flannery will make the changes necessary to position GE better for longer-term prosperity, but in the interim expects "a significant EPS/FCF reset and a potential dividend cut" to weigh on the shares, which Goldman continues to rate at Neutral.
"I think General Electric (GE -1.3%) has to reset expectations much lower when it reports on Oct. 20 and perhaps even cut the dividend even though the company said again that it's a top priority.... that would take the stock to $20 - why bother to hold it?"
"I think you could then begin - after estimate cuts - to reverse, even after a dividend cut at this point, because it yields almost the most in the Dow."
"I believe in John Flannery as the new CEO. I think he is going to explain his plan for the business and I think it's going to be good... he will get the job done."
A carbon tax is "just not going to happen," said Ann Klee, GE's VP of environment and health and safety, at the event. "The answer has to be the market," adding that the tax is not what industry wants and it is not feasible.
A carbon tax would force industry to pay for emitting greenhouse gas emissions; proponents say it would encourage a transition away from fossil fuels such as coal and oil, and toward renewable energy resources such as wind and solar.
But Klee said the answer to the issue surrounding carbon dioxide and the climate resides in advanced technology development driven by the market, not by picking "winners and losers."
Key events are scheduled for the companies listed below next week.
Notable earnings reports: Netflix (NASDAQ:NFLX), Sonic (NASDAQ:SONC) and Charles Schwab (NYSE:SCHW) on October 16; Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) on October 17; USB (NYSE:USB), American Express (NYSE:AXP), United Continental (NYSE:UAL), Supervalu (NYSE:SVU), Alcoa (NYSE:AA) on October 18; PPG Industries (NYSE:PPG), BB&T (NYSE:BBT), Blackstone Group (NYSE:BX) and Philip Morris (NYSE:PM) on October 19; General Electric (NYSE:GE), Honeywell (NYSE:HON), Procter & Gamble (NYSE:PG) on October 20.
IPOs expected to price: Qudian (Pending:QD) on October 17; MongoDB (Pending:MDB) and LiveXLive Media (LXL) on October 18; Sea (Pending:SE) and Rise Education (NYSEARCA:RISE) on October 19; Fat Brands (FAT) on October 20.
Secondary offering lockup expirations: Performance Food Group (NYSE:PFGC), Azul (NYSE:AZUL), FibroGen (NASDAQ:FGEN) on October 16; Spherix (NASDAQ:SPEX), Cyclacel Pharmaceuticals (NASDAQ:CYCC) on October 17; Floor & Decor (NYSE:FND), USA Technologies (NASDAQ:USAT), ContraFect (NASDAQ:CFRX), XPO Logistics (NYSEMKT:XPO), Regulus Therapeutics (NASDAQ:RGLS), Inovio Pharmaceuticals (NYSEMKT:INO) on October 18; Communtiy Healthcare (NYSE:CHCT) on Ocotber 19.
Analyst quiet period expirations: Best (NYSE:BSTI), Despegar.com (NYSE:DESP), Zai Lab (Pending:ZLAB), Krystal Biotech (Pending:KRYS) on October 16; Secoo (NASDAQ:SECO) on October 17.
Analyst/investor meeting: Ferroglobe (NASDAQ:GSM) on October 17.
Special shareholder meeting: Southwest Bancorp (NASDAQ:OKSB) on October 18; Tribune Company (NYSE:TRCO) and MetLife (NYSE:MET) on October 19.
Credit card charge-off reports: American Express, Bank of America (NYSE:BAC), Citigroup (NYSE:C), Capital One (NYSE:COF), Discover (NYSE:DFS), JPMorgan (NYSE:JPM) and Synchrony Financial (NYSE:SYF) on October 16.
Robin Hood conference: Speakers scheduled for the two-day event starting on Thursday include Jana Partners' Barry Rosenstein, Third Point's Daniel Loeb, Appaloosa Management's David Tepper as well as CEOs from Take-Two Interactive Software (NASDAQ:TTWO) and Agios Pharmaceuticals (NASDAQ:AGIO).
Amazon watch: The e-commerce juggernaut's push into private-label sportswear could rattle Nike (NYSE:NKE), Lululemon (NASDAQ:LULU), Under Armour (UAA, UA), Gap (NYSE:GPS) and Adidas (OTCQX:ADDYY) as more details emerge.
FDA watch: Novo Nordisk (NYSE:NVO) faces an advisory panel on a diabetes drug injection candidate. Merck (NYSE:MRK) presents Phase 2 data on Keytruda combo with Celgene's (NASDAQ:CELG) CC-486 for non-small cell lung cancer.
Barron's mentions: JD.com (NASDAQ:JD) is seen as having more upside than Alibaba (NYSE:BABA), while some tips are offered up on how Google ([GOOG]], GOOGL) can play catch-up with Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) in cloud technology. The spotlight falls on earnings growth at Procter & Gamble after the company wons its board battle. Remember Black Monday 1987? Barron's does in a cover article that talks about the risk of a machine-driven meltdown.