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General Electric (GE): How Do You Solve a Problem Like Bleeding Capital?

J.P. Morgan's Stephen Tusa warns to expect high probability on one more GE dividend cut for a company desperate for more capital.


One bear says the writing is ominously on the wall for General Electric Company (NYSE:GE): odds are this is a company giving critical thought to a dividend cut; and it certainly is not the first time. It was in November of last year that this challenged industrial giant faced its second dividend cut from the Great Depression. Present day, the company is still looking at a need for roughly $32 billion in capital, even on back of its Transportation unit merger with Wabtec; a deal that should bring an extra $2.9 billion in cash to GE’s table.

J.P. Morgan analyst Stephen Tusa is well aware that his calculation that the company requires around $32 billion towers over GE’s expectation of $20 billion in asset sales, a move that would lessen its debt-to-adjusted earnings ratio down to 2.5. As such, Tusa is quite bearish, critical that GE’s need for capital is “well in excess of the initial $20 billion ‘in value’ investors had been treating as a silver bullet, and a target GE is clearly missing.”

“With little available cash flow to naturally de-lever, we don’t see how, from a risk mitigation perspective, a company of this size and complexity cannot be seriously considering at least a dividend cut and/or a more aggressive approach to reinforcing its capital base,” writes Tusa, who does not see enough of an “offset to these negatives.” All Tusa sizes up is a shift in releasing adjusted EPS and a related guide that remains the same, and only a slew of restatements that aim to conceal the bleak situation.

Quite cynical on GE’s alleged comeback story, the analyst points out: “If the outcome of the next several months is more complex, financially engineered moves short on cash, and built on promises around future growth, on the back of perpetually adjusted numbers, we scratch our heads as to how that cannot be juxtaposed to the ‘fresh start/reset’ narrative.”

Ultimately, “While some Bulls suggest rising rates will take care of pension, we think relying on this would be an irresponsible strategy for any management or Board, given standing leverage and stakeholders such as pensioners, employees and a heavy retail base,” contends Tusa, who maintains his pessimistic conviction that GE’s format on adjusted earnings is to put it bluntly “detached from FCF reality.”

Therefore, the analyst reiterates an Underweight rating on GE stock with an $11 price target, which implies a 27% downside from current levels. (To watch Tusa’s track record, click here)

TipRanks suggests caution is the word on the Street when it comes to the industrial empire’s market opportunity. Out of 12 analysts polled in the last 3 months, sentiment is split evenly in the battle between the bulls and the bears: 3 rate a Buy on GE stock, a majority of 6 remain sidelined, while 3 are bearish on the stock. The 12-month average price target stands at $15.31, aligning with where the stock is currently trading.