Ask the Investor: Will the new CEO of General Electric ignite the stock price?By: Ryan T. Fulmer
Thursday, October 5, 2017
Question: “Will the new CEO of General Electric ignite the stock price?”
General Electric (GE) is one of the most widely-owned stocks in the S&P 500 with roots traced back to the Edison Lamp Company by American icon Thomas Edison in 1889. About ten years later, General Electric was listed as one of the original 12 companies in the Dow Jones Industrial Average consistently regarded as a “must own company” in the stock market.
In more recent years, General Electric (GE) has been considered a leader in corporate management due to famed Chief Executive Officer (CEO) Jack Welch, who increased the company’s market value from $14 billion in 1981 to $400 billion over the two decades of his leadership. “Neutron Jack” was also famous for eliminating jobs and firing the bottom 10% of staff each year at many of the 600 companies he acquired.
Many of the strategies that resulted in “Neutron Jack’s” incredible success have caused havoc since the financial crisis in 2008; the consequences being that many of the non-core companies were spun-off or sold at relatively unattractive prices.
As my father always said, “The stock market is a great equalizer,” and General Electric’s stock price has underperformed the S&P 500 over the last decade by 118% which reflects many of the concerns I have highlighted above.
The stock price may be near a bottom.
In August, General Electric announced that John Flannery would replace Jeff Immelt as CEO, three months ahead of schedule. Since summer, John has conducted exhaustive research by analyzing every business segment to determine the best course of action for the future.
Unfortunately, the replacement of the CEO has not stopped the stock price from declining as last week investors became increasingly worried about the company’s ability to pay their lofty 4% dividend. At this point, I believe that the stock market is pricing in a 40-60% dividend cut.
It is possible that the majority of the decline in GE’s stock price has already occurred. Patient investors should look carefully at General Electric’s financials before investing as it is possible that the Aviation and Healthcare divisions could face pressure as the Power segment (currently very weak) begins to show improvement in 2-3 years.
In my experience when investors start capitulating it is usually a sign that the worst may be over. However, it may take several years before Flannery can prove to investors that he has fixed the legacy issues from ‘Neutron Jack’, and the stock receives a valuation that reflects reduced long-term uncertainty.
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