By Thomas Gryta
General Electric Co. shares tumbled 5.9% on Tuesday, causing the conglomerate to lose its crown as the biggest U.S. industrial company as Wall Street digests a turnaround plan announced Monday.
GE's new chief executive, John Flannery, said Monday the company would cut its dividend in half and shed multiple divisions, and that it may take years for a recovery. The lack of a dramatic move, such as a breakup or its dropping a major division, and the long timeline isn't sitting well with investors who waited four months for the plan.
"It will take a long time to work through GE's operations toward eventually turning its fortunes around," said Deutsche Bank analyst John Inch. The dividend cut was steeper than Wall Street expected, he said, which could exacerbate the selloff "as retail investors who previously counted on the GE dividend look elsewhere."
More than 40% of GE's common shares are owned by retail investors, Mr. Inch said.
GE shares fell to $17.90 Tuesday -- after falling 7.2% Monday -- and are down 43% for the year. Its shares have closed down 127 out of the 220 trading days this year.
The decline has left GE with a market value of $155.23 billion, while Boeing Co. shares have enjoyed a 68% gain this year, leaving GE behind as Boeing's market cap reached $155.9 billion. A year ago, GE was worth about $270 billion while Boeing was valued at $92.6 billion.
Several investors said short sellers were active in the stock, a strategy that is now cheaper with the lower dividend.
Short sellers borrow a stock and then sell it, betting its price will drop so it can be repurchased at a lower price and returned to the lender. If a stock pays a dividend, the short seller doesn't get that dividend but must compensate the lender for it. A lower dividend generally reduces that cost.
One New York hedge-fund manager said "everyone on Wall Street" was betting on further GE declines. Now investors are trying to decide on the appropriate multiple for the lower outlook, whether the outlook is credible and where GE could end up if the economy slows down, the person said.
RBC Capital analyst Deane Dray downgraded GE stock to sector perform from outperform, citing the unexpected length of a turnaround.
"While the market was not expecting any quick fixes, we believe that CEO John Flannery's highly anticipated plan fell short of expectations regarding the scope of the business model/portfolio changes," Mr. Dray said, in a note to clients.
Nicholas Heymann, an analyst with William Blair & Co. who still has an outperform rating on the stock, is less pessimistic. He sees the shares under pressure for a few weeks, but expects it to settle around $20 to $21.
GE is now working to convince investors of its plans. Both Mr. Flannery and Chief Financial Officer Jamie Miller on Tuesday defended the dividend cut as a necessary step, so the extra cash can be allocated in different and more flexible ways.
Ms. Miller stressed that this is just the beginning.
"This is where we are starting," she said, "but look, there's going to be updates over the next two or three years on our views as we evolve."
--David Benoit contributed to this article.
Write to Thomas Gryta at [email protected]