By Thomas Gryta
General Electric Co.'s new leader outlined a restructuring plan that will slash the annual dividend by $4 billion and streamline the industrial giant's operations, but warned investors it will take years to fix some of the company's businesses and for profits to begin to improve.
GE Chief Executive John Flannery lowered earnings targets for 2018 and cautioned that even in 2019 conditions will be difficult, especially in the company's biggest unit, GE Power. He laid out a future for three core markets -- power, aviation and health care -- and said the company would look to shed smaller divisions such as transportation and lighting.
GE is "going to be a smaller business, a simpler business" but 2018 is going to be "a reset year," he told investors at a meeting Monday. The presentation followed a strategic review after the GE lifer took over the top job on Aug. 1.
The moves stop short of a breakup or more-radical restructuring of the 125-year-old company that some analysts had called for, though Mr. Flannery left open the possibility of further portfolio changes. "It is for the market to decide," the new CEO said Monday. "Unless I show results, it isn't going to matter."
Shares of GE tumbled after his presentation, dropping 7.2% to end Monday's trading session at $19.02, its lowest close in five years and its worst single-day drop since the financial crisis. The stock has declined 40% this year, missing out on a broad stock-market rally.
Some investors said they hoped for more-aggressive action and a shorter timeline.
"They didn't layout as much as we were expecting to see," said Janna Sampson, co-chief investment officer of OakBrook Investments, which owned 1.1 million shares at the end of September. She said she was expecting a dividend cut but looking for the company to make a bigger move to stimulate the stock and is concerned that the long-term plan means the share price will be "dead money" in the interim.
"If that is all you were going to say, why did we have to wait from July until November?" she said.
Mr. Flannery said he wasn't surprised by Monday's sharp selloff. "We announced a major cut in our dividend and a major cut in our guidance in 2018," he said after the meeting. "We had disappointing news today -- no sugarcoating that."
It may be a challenge for Mr. Flannery to fetch top prices for some of the businesses he identified as noncore, since some of them are in cyclical industries that are under pressure. GE also has owned some of the businesses for decades, meaning it could face a big tax hit on a straight sale. Mr. Flannery said GE could choose to spin off assets or form joint ventures instead.
The company set new financial targets for 2018 that were well below its previous goals. It now expects adjusted earnings per share of $1 to $1.07. For years, GE had promised investors it would deliver $2 a share in 2018 earnings. The company changed CEOs earlier this year as it began to struggle to reach that target.
Mr. Flannery compared his first 100 days as CEO to his previous role running GE's health-care division. There was pressure to sell that unit when he arrived as CEO in 2014, but he found a way to fix the unit's problems while still keeping open the option to unload it.
The 30-year GE veteran said he is building a leadership team of "fresh eyes and people with institutional memory." Since he took over he has made several management changes. He appointed a new finance chief and head of GE Power, and two GE veterans, the head of marketing and the top international executive, recently announced their departures. On Monday, Mr. Flannery said he is revamping compensation for senior executives, lowering the cash portion and giving 50% of their pay in equity.
In addition to shedding its century-old transportation and lighting businesses, Mr. Flannery said the company would look to sell its stake in Baker Hughes, an oil-field-services provider. GE owns about two-thirds of the company, which has a market value of about $40 billion. Shares of Baker Hughes fell 3.2% on Monday.
GE also unveiled a restructuring of its board of directors, saying it would reduce its membership to 12 people, including three new members. GE currently has 18 directors, including Mr. Flannery and Ed Garden, a co-founder of activist Trian Fund Management, which is a large GE investor.
The new quarterly dividend will be 12 cents a share, down from 24 cents a share. GE would reduce the payment from $8.4 billion to $4.2 billion, or a dividend yield of about 2.5% based on Monday's close.
The industrial giant is one of the biggest dividend payers in the U.S., but it has struggled to generate profits and cash flow from its industrial operations in recent years to cover the payout.
"We understand this is an extremely painful action for our shareholders, our owners," Mr. Flannery said. "It's not a decision we took lightly."
The company, one of the original members of the Dow Jones Industrial Average and one of the most widely held U.S. stocks, has paid a dividend since 1899. GE last cut its dividend in 2009, when it reduced the payout to 10 cents a share from 31 cents.
Mike Bailey, director of research at FBB Capital Partners, called the news out of GE on Monday a "train wreck" that "left a bad taste in everyone's mouth." FBB, a wealth manager with $1 billion in assets under management, has about $5 million of clients' money in GE stock, Mr. Bailey said.
"At this point, we're going to let the dust settle a bit," Mr. Bailey said. For FBB's clients, GE's dividend cut came as a surprise, Mr. Bailey said. "Most investors thought GE was a sleep-at-night stock," he added.
Jeffrey Elswick, co-chief investment officer at Frost Investment Advisors, which holds GE debt, said he was pleased by the decision to cut the dividend. "They're attempting to do the right things for what GE is today," he said.
When he was named CEO in June, Mr. Flannery said the dividend was safe, but he recently warned that his thinking had evolved during his portfolio review. On Monday he said the company's cash flow projections have changed dramatically. "Fundamentally that dividend was predicated on us growing to a certain level that we just didn't see," he said.
Former CEO Jeff Immelt referred to cutting the dividend as the worst day of his tenure.
Mr. Immelt revamped the company over his 16 years, including selling media, plastics, appliances and most of financial services. He also made some ill-timed deals in the oil and power markets. While the company changed substantially, it didn't increase cash flow.
Earlier this year, under pressure from Trian, Mr. Immelt pledged to cut annual spending by $2 billion. After lowering financial targets last month, Mr. Flannery pledged to cut an additional $1 billion in spending, though he gave few new details Monday on his cost-cutting plans. He did promise to cut $400 million from GE's digital efforts, which had been a priority during Mr. Immelt's tenure.
--Cara Lombardo, Michael Wursthorn and Daniel Kruger contributed to this article.
Write to Thomas Gryta at [email protected]