The new chairman and CEO of General Electric is never going to have more “political capital” to cut the dividend than now, longtime GE shareholder Jack De Gan told CNBC on Friday after a huge earnings miss slammed shares of the industrial conglomerate.
De Gan was commenting on recent market speculation that GE may reduce its dividend and use the cash to help turn the company around.
GE Chief Executive John Flannery has “one opportunity to cut the dividend, and this is it,” argued De Gan, who invests in GE on behalf of clients at New Hampshire money management firm Harbor Advisory, where he’s chief investment officer. He said he does not personally own any GE stock.
“Clearly a dividend cut would free up a lot of flexibility for John Flannery to execute his restructuring; $8 billion a year in dividends is a big burden,” De Gan said on “Squawk Box.” “It would upset the shareholder base. And the stock would be dead money for while. [But] this is when he should do it, if he’s going to do it.”
Earlier Friday, GE reported adjusted third-quarter profit of 29 cents per share, missing estimates by 20 cents. GE also cut its full-year outlook to a range of $1.05 to $1.10 per share versus estimates of $1.53 per share. GE stock fell as much as 8 percent in premarket trading, but shortly after the opening bell, it was down about 3 percent to $22.75.
At a price of around $22.75 per share and a current annual dividend of 96 cents, GE’s dividend yield is now 4.19 percent, its highest in 30 years not including the financial crisis.
The yield of 4.19 percent puts GE only second behind slow-moving telecom Verizon on the list of the 30 members of the Dow Jones industrial average with the biggest yields. Verizon’s dividend yield is 4.8 percent.
On Tuesday, Value investor Bill Nygren, portfolio manager of the Oakmark Fund, told CNBCthat any company with a high dividend yield, such as GE, faces “risk to the dividend or it wouldn’t be priced like that.”
In a research note earlier this week, Goldman Sachs said GE may likely cut its dividend soon as the company looks to simplify its businesses and streamline its accounting under Flannery after years of “financial engineering.”
In Friday’s earnings press release, Flannery called the quarter “very challenging.” Flannery, who plans to deliver a strategic update next month, became CEO in August and chairman earlier this month after Jeff Immelt stepped down from the posts that he had assumed in 2001 when Jack Welch retired.
Adding another layer to the GE story, billionaire activist investor Nelson Peltz of Trian Partners, a major shareholder, has been pushing for changes. Earlier this month, Trian co-founder Ed Garden was appointed to the GE board. Peltz said on CNBC that Flannery told Garden “everything is on the table” to boost the languishing stock price.
Shares of GE were off 25 percent based on Thursday’s close compared to the S&P 500‘s 14.4 percent gain over the same period.
GE shareholder: Cut the burdensome dividend now while you have the 'political capital'