Streetwise for Sunday, November 11, 2018
Nothing worthwhile in life comes easy and investment success is no exception. Yes, Wall Street can be a rose garden but only if you avoid the ever-present thorns. One way of doing so is to maintain a firm belief that you only invest in a company because you are totally on board with what a company is trying to accomplish and how it plans to get there.
You must be convinced, beyond any doubt, that a combination of products, market potential and on-going management strength is present in a synergistic combination that will yield a continuing increase in revenues, earnings and dividends.
General Electric (GE) does not, in my opinion, meet that requirement. In fact, for the past three years the company has been my leading sell candidate despite considerable push back.
Two years ago, General Electric was a $260 billion industrial giant emerging from a major streamlining effort with high hopes of becoming a top 10 software company.
Now, it is a tale of bad management facing a major decline that in my opinion can only end in one of two ways. Either the remains of the company are sold off, or it simply declares bankruptcy and is left to its creditors.
Back when Jeff Immelt took over from Jack Welch as General Electric’s CEO in 2001, shares of the company were trading about $40. Today they are trading at about $9.20.
General Electric’s most recent chief executive, Lawrence Culp, recently announced the once-mighty conglomerate was cutting its dividend for the second time in a year.
The company has paid an annual dividend since the 1930s, helping cement its reputation as one of the bluest of Blue-Chip stocks. The dividend, which was cut from 24 cents to 12 cents a share in September of 2017, will now pay investors just a penny per share.
The move will save the cash-starved company around $4 billion but punishes the investors who depended on General Electric’s dividend for income.
Until recently, as has been the case for other large, well-known companies, General Electric has received a proverbial “Get out of jail,” card simply because it is General Electric. After all, the company can trace its roots to Thomas Edison and until recently was the only original member of the Dow Jones Industrial Average that was still in the index.
If someone is to answer for General Electric’s performance debacle the blame could rightfully be placed at the doorstep of Jeff Immelt. Immelt’s energy and power acquisitions were done just as those markets slid downward. However, he was not alone.
Steve Bolze, former head of General Electric’s power unit and once a top contender to succeed Immelt, failed to grasp the magnitude of the weakening demand.
Jeff Bornstein, General Electric’s former chief financial officer, joined with Immelt when it came to overly optimistic financial forecasts. Bornstein admitted responsibility, however his “falling-on-the-sword” rhetoric did little for shareholders.
Immelt presided over a clumsy, decade-long transition from a company dependent on finance to one that bet its future on green power. Investors eventually grew impatient with the stock’s long slide and forced him out last year. Immelt was replaced by John Flannery, who himself was fired October 1.
Culp must be hoping that the only way to go from here is up. However, investors are unlikely to give him much time to prove it. To his credit, Culp tried to show confidence by purchasing $2.2 million worth of General Electric stock during its recent precipitous price drop after the company reported weaker-than-expected third-quarter earnings There is also an expanded federal investigation into its accounting practices.
Culp stepped into the CEO role on October 1, after the company ousted his predecessor, John Flannery, whose tenure was just 14 months. Nonetheless, the board allowed Flannery to receive $4.25 million in severance pay.
Even as the outlook for General Electric continues to deteriorate, some analysts continue to be positive on the outlook for the shares and the company. I am not.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.