Unexpectedly Intriguing!
19 October 2017

2017 hasn't been a good year for General Electric (NYSE: GE), and now, the company's new CEO, John Flannery, who took over from Jeffrey Immelt in August 2017, is shaking up the company as its financial problems are reaching a crisis point, all while its stock price continues its 2017 trend of descent.

GE Stock Price History - 2017 - Snapshot on 2017-10-17 - Source: Google Finance

That much is evident from the just announced departure of the company's new Chief Financial Officer, Jeff Bornstein, who had just moved into the CFO position at the same time Flannery was elevated to be GE's Chief Executive Officer. The unexpected change points to ongoing issues with the company's financial situation, which appears to be deteriorating.

GE's management has been over-promising and under-delivering, and you only have to look at the nearly 27% decline in the company's stock price this year to see the impact. GE hasn't formally abandoned its EPS targets for this year and the next, but the commentary around those targets has grown increasingly negative. Moreover, there are signs of deteriorating quality of earnings. Consider:

  • GE significantly missed its own expectations for cash flow generation by $1 billion in the first quarter.
  • On the second-quarter earnings call, Bornstein guided investors toward the bottom end of the full-year earnings and cash flow guidance ranges.
  • Immelt's long-held target of $2 in operating EPS in 2018 is significantly above the analyst consensus of $1.63.

In a nutshell, market analysts believe that GE isn't going to make its earnings numbers, and what's more, they also believe that GE's cash flow is in trouble.

... when GE reported a cash flow shortfall of $1 billion in the first quarter--with $300 million of it from contract assets--it highlighted the fact that GE has been booking revenue and earnings which haven't been dropping through into cash flow as yet.

The combination of lackluster earnings and strained cash flow means that the company will likely be forced to cut its dividend. As a general rule, companies need at least one of these two things working in their favor in order to sustain their dividends without negatively impacting their other operations and costs, but since GE has neither of these going for it at this time, there is a very real possibility that the company will be compelled to slash its dividend in the very near future as part of an overall restructuring initiative. As in today or tomorrow, with a potential 25% cut from the current quarterly dividend payout of $0.24 per share down to $0.18 per share....

Since GE is one of the largest company's in the U.S., at least as measured by its market capitalization, what happens to GE will have a noticeable effect on major stock market indices like the S&P 500 (Index: INX). Because we use the future expectations associated with the index' dividends per share to project its future trajectory, we wondered how much GE cutting its dividend might affect those future expectations.

So we built the following tool to do the math. If you're accessing this article on a site that republishes our RSS news feed, please click through to our site to access a working version of the tool. The default stock price, market cap, and dividend data in the tool applies for General Electric and the S&P 500 as of the close of trading on 17 October 2017.

Individual Company Stock Data
Input Data Values
Stock Price per Share
Dividends per Share Paid During Last 12 Months
Number of Shares Outstanding
New Dividends per Share Paid During Next 12 Months
Reference Market Cap-Weighted Index Data
Reference Market Capitalization of Index
Reference Index Value
Current Stock Market Index Data
Current Index Value
Index Dividends per Share Paid During Last 12 Months

Market Capitalization and Dividend Change
Calculated Results Values
Index Dividends per Share To be Paid Over Next 12 Months
Change in Index Dividends per Share

For the default data that applies for GE in October 2017, we find that should the company cut its dividend by 25% from its current dividend level, the impact to shareholders of S&P 500 index funds would a reduction of $0.23 per share in their annual dividend payouts, or a little under 0.5%.

Because we built this tool to be able to consider the impact of a change in dividends paid out by any dividend-paying component of a market cap-weighted stock market index, you're more than welcome to use it to consider the dividend change situation at other companies - just make the appropriate substitutions in the tool, and we'll take care of the math.

The tool however does not consider what the other dividend-paying components of the index are doing with their dividends, so it should be used only to consider what effect that a change in a single company's dividend policy might have on the dividends that would be paid to investors in a market cap-weighted index fund.

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