It is the 16th of December 2019

GE Options Are Pricing In Massive Dividend Cuts

GE shares are languishing at more than four year lows (as the broader market soars to record highs) and GE credit risk stands at 8 month highs (almost dopuble the post-crisis lows hit in June). As Goldman analyst Joe Ritchie warns, a significant earnings per share/free cash flow reset looms and the prospect of a dividend cut is dragging the stocks lower.

Ricthie says he would "ideally want to get more positive" with the stock hitting 52-week lows and sentiment at its most bearish since initiating coverage four years ago, however, a fresh look at fundamentals "leaves us incrementally bearish."

Expects new CEO John Flannery to make changes necessary to position the company better for longer-term prosperity.

GE's stock dividend yield has never been so high to its corporate bond yield...


And as Susquehanna's derivative strategist Chris Jacobson notes, GE options are pricing in a dramatic cut in dividends in the next few years.

In fact, GE options are implying ~71c of cumulative dividends between now and January 2019, compared with the ~$1.20 that would be expected without any action

As Chris Whalen recently noted, traders continue to puzzle over the latest management changes at General Electric Co, the once iconic symbol of American industrial prowess.  Over the past year, GE's stock price has slumped by more than 20% even with the Fed's aggressive asset purchases and low rate policies.  Just imagine where GE would be trading without Janet Yellen. 

To be fair, though, much of GE’s reputation in the second half of the 20th Century came about because of financial machinations more than the rewards of industry.  A well-placed reader of The IRA summarizes the rise and fall of the company built by Thomas Edison:

“For years under Welch, GE made its money from GE Capital and kept the industrial business looking good by moving costs outside the US via all kinds of financial engineering.  Immelt kept on keeping on. That didn't change until it had to with the financial crisis.  No matter what, untangling that kind of financial engineering spaghetti is for sure and has been a decade long process.  No manager survives presiding over that.  Jeffrey Immelt is gone.”

Those transactions intended to move costs overseas also sought to move tax liability as well, one reason that claims in Washington about “overtaxed” US corporations are so absurd.  Readers will recall our earlier discussion of the decision by the US Supreme Court in January not to hear an appeal by Dow Chemical over a fraudulent offshore tax transaction.

The IRS also caught GE playing the same game.  Indeed, US corporations have avoided literally tens of trillions of dollars in taxes over the past few decades using deceptive offshore financial transactions.  Of note, the Supreme Court’s decision not to hear the appeal by Dow Chemical leaves offending US corporations no defense against future IRS tax claims.

Like other examples of American industrial might such as IBM (NYSE:IBM), GE under its new leader John Flannery seems intent upon turning the company into a provider of software.  Another reader posits that “they’re going to spend a decade selling the family silver to maintain a dividend and never make the conversion they would like and never get the multiple they want.  GE is dead money at a 4% yield, which given some investors objectives – retirees and the like -- might not be such a bad thing.”

The question raised by several observers is whether the departure of Immelt signals an even more aggressive “value creation” effort at GE that could lead to the eventual break-up of the company.  Like General Motors (NYSE:GM), GE has been undergoing a decades long process of rationalizing its operations to fit into a post-war (that is, WWII) economy where global competition is the standard and the US government cannot guarantee profits or market share or employment for US workers.

GE's decision this past June to sell the Edison-era lighting segment illustrates the gradual process of liquidation of the old industrial business.  Henry Ford observed that Edison was America’s greatest inventor and worst businessman, an observation confirmed by the fact that Edison’s personal business fortunes declined after selling GE.  In fact, the great inventor died a pauper.  And of the dozen or so firms that were first included in the Dow Jones Industrial Average over a century ago, GE is the only name from that group that remains today.

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We dohave a suggestion for GE management to perhaps cut costs and push a little more back to shareholders - perhaps stop the practice of having an empty private jet fly along side the CEO's private jet... just in case of delays...

When Jeff Immelt traveled, he wanted to take no chances of running late.

The former GE CEO used to have an empty private plane follow his own on trips, the Wall Street Journal's Thomas Gryta and Joann S. Lublin report in a story about the new CEO's cost cutting efforts. The extra jet was meant as a spare in case the primary plane suffered mechanical problems.

It's not exactly the most frugal or environmentally-friendly solution, which may be why crew members were told not to openly discuss the two planes, according to the report. They sometimes parked far away from each other to avoid raising eyebrows. A GE representative confirmed to the WSJ that the jets were used on "limited occasions for business-critical or security purposes."

The news comes as current GE CEO John Flannery prepares to cut costs, including laying off thousands of employees.

Finally, we note that as one of the longest-lasting Dow members, GE's comparative rise and fall relative to the market may be interesting...

For the 3rd time in the last 50 years, The Dow is trading at 1000x the price of GE shares - it has not ended well for the market.

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