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Harsh Realities Ahead for GE

We still see long-term potential, but after a dividend cut and planned restructuring, we're cutting our fair value estimate to about $26.

At GE's long-anticipated investor update this week, CEO John Flannery reset expectations to reflect the harsh realities of what we believe will likely be a multiyear turnaround. With the dividend cut by half to $0.48 per share, significant restructuring planned for the power segment, and no imminent breakup of the industrial conglomerate on the table, we believe maximum pessimism has been reached.

In these early days of Flannery's tenure, we like that his messaging repeatedly addresses questions we consider most important to investors: How will GE improve its free cash flow, and how will the company allocate that cash going forward? Cutting the dividend is painful, but it frees capital to allocate toward restructuring. Flannery also highlighted $20 billion of assets earmarked for divestiture over the next two years, including transportation, lighting, and up to 10 other smaller businesses, a sign of purposeful redirection of capital and management attention toward businesses with strong potential for secular growth. Finally, management incentives will be pegged to free cash flow performance, a change we welcome to better align the company's interests with shareholders'.