General Electric’s (GE) newly unveiled strategic road map was not well-received by markets, with GE shares falling almost 8% on Monday. The conglomerate’s announcement to narrow its business focus to three core units did not go as far as some analysts expected. Meanwhile, the company’s decision to slash its dividend in half wasn’t good news for investors, particularly those who relied on the income.
Chief Financial Officer Jamie Miller told Yahoo Finance the dividend cut was an important reset as the company enters a new era.
“We felt we needed to take a step back and really set the dividend at a level that was an appropriate payout ratio for us and one, frankly, that was more inline with our peers,” Miller told Yahoo Finance.
The dividend cut to $0.12 per share from $0.24 aligns the company’s payout with its less robust free cash flow, which is expected to be $6 to $7 billion next year versus initial expectations for $12 to $14 billion.
Miller emphasized, though, this reset should be thought of in the context of broader shareholder return and enabling the stock price to improve over time with better targets.
“We’re really looking at a total shareholder return profile for the company,” she said. “In addition to dividend, looking at capital allocation along the lines of other things like M&A, organic investment and buybacks so that we can so dividend income as well as accretion in the stock over time.”
Miller, who stepped into the CFO role two weeks ago after a decade at the company, said one of her biggest surprises were the deeper issues in the Power business, which has had the most significant impacted to cash flow.
GE also announced new financial targets for next year that stand significantly below prior goals. GE sees EPS of $1.00 to $1.07 per share versus the long-held $2.00 target for 2018.
Portfolio refocus… but is it enough?
GE began its “reconstruction phase,” as RBC put it, under new CEO John Flannery on Monday, by announcing its narrowed focus to three business units—Aviation, Healthcare Equipment and Power—which account for about 60% of the company’s revenue.
But heightened expectations for a complete overhaul may not have been met, even as the company has announced it will divest $20 billion of assets over the next one to two years. (The company will be shedding its locomotives and lighting business either via sales or spin-offs, and is also looking at shedding its majority stake in Baker Hughes.)
Miller said the business units, and the transformation progress, will continue to be analyzed going forward.