General Electric Co. announced on Monday that it’s cutting its dividend in half to 12 cents a share per quarter. The move should save GE about $4 billion annually, based on its current share count. While a painful embarrassment for a company whose dividend is as much a part of its identity as light bulbs, this aggressive slashing was the right move. The math just didn’t add up, with GE set to earn only about $2 billion in free cash flow from its industrial operations this year. The numbers will only become tighter if GE reworks its structure — and that seems to be the plan.
Details of the company’s expected divestitures will come later this morning as GE holds an investor day meeting in New York. Just about everything but GE’s main health-care, aviation, power and renewable-energy businesses will reportedly go. That puts operations from transportation and lighting to GE’s stake in the publicly traded combination of its energy assets with Baker Hughes Inc. all potentially on the chopping block. This streamlining is a step in the right direction, and is vital to making the dividend cut go down smoother for GE’s investor base. Smaller companies pay smaller dividends.
It seems unlikely that GE will acquiesce to investors’ hopes for a radical breakup that would have seen nearly all of the company’s units stand alone. Time will tell whether that’s the right strategy. GE’s power unit is grappling with weak demand and increasing competition for lucrative service agreements that were the biggest profit driver for the business. Those trends aren’t going to reverse any time soon. Siemens AG CEO Joe Kaeser recently admitted German utilities have ordered just two gas turbines in the past three years.
Companies such as GE, which has been around for 125 years and trace its roots back to Thomas Edison, don’t get that many opportunities to completely reinvent their identity. Flannery has one shot at this. He’s shown a willingness to be radical. The question is whether he will go far enough.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.