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Why General Electric Company Stock Tumbled Today

The Motley Fool logo The Motley Fool 5/23/2018 Jeremy Bowman

What happened

Shares of General Electric (NYSE: GE) took a dive today after CEO John Flannery cooled off hopes of a speedy turnaround at the struggling conglomerate. He warned that the industrial giant's power division wouldn't see profit growth until 2020, and also said he couldn't guarantee the company would be able to keep paying a dividend. 

As a result, the stock finished down 7.3%.

A GE gas turbine.© General Electric A GE gas turbine.

So what

Speaking at the Electrical Products Group conference, Flannery cautioned on the two accounts above, and lowered the company's profit margin target in the power division to 10% in the near term from the low- to mid-teens, which could affect the company's credit ratings.  

The power business is GE's biggest segment in terms of profits and revenue, and Flannery blamed the disappointing guidance on weak demand for the company's gas turbines. Meanwhile, he responded to a question about the dividend by saying that it would be dependent on free cash flow, notably passing on the opportunity to reassure investors that it wouldn't be slashed after the company already cut it in half last November.

As GE prepares to sell off assets in order to simplify the company and pay down debt, free cash flow is expected to shrink, which could lead to a lower dividend payout. 

Now what 

Flannery inherited a wreck of a company last year as former CEO Jeffery Immelt relied on financial engineering and debt financing to produce growth. Immelt also made misguided acquisitions like the $9.5 billion purchase of Alstom that has turned into a bust as coal demand has fallen.

Since Flannery took over last August, calls for a breakup of the company have increased and the stock price has continued to spiral. The company made its first major asset sale since he took over earlier this week, merging its transportation division with Westinghouse Air Brake Technologies in a deal that will generate $12.3 billion for GE.

However, the CEO's statement today made it clear that any potential turnaround for the conglomerate is going to be slow and plodding. At this point, things may get worse before they get better for GE investors as stagnating profits and a dividend cut could hammer the stock again.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Westinghouse Air Brake Technologies. The Motley Fool has a disclosure policy.


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