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GE drags on the Dow as Wall Street worries the dividend is at risk

Key Points
  • Deutsche Bank predicts General Electric will be forced to reduce its dividend and lower its earnings guidance in the coming years.
  • The firm downgrades the industrial company to sell from hold.
  • GE shares are down 9 percent this year through Thursday compared to the S&P 500's 7 percent return.
An employee of General Electric works on a gas turbine at the GE plant in Belfort, France.
Sebastien Bozon | AFP | Getty Images

Deutsche Bank lowered its rating on General Electric to sell from hold, saying the industrial blue chip will be forced to reduce its dividend and lower its earnings guidance in the coming years.

"GE's weak cash flow has become worse in recent quarters … The company appears to be operating relatively 'close to the line' in terms of sufficient cash generation to continue to fund such a robust dividend and share repurchase program," analyst John Inch wrote in a note to clients Friday. "Eventually, GE could proportionately run out of things to sell while the capital dividend should largely be gone after 2018."

General Electric's current dividend is 24 cents per quarter. The company's dividend yield is 3.3 percent, according to FactSet. The shares dropped more than 2 percent Friday for the worst decline in the Dow Jones industrial average.

The analyst lowered his price target for General Electric to $24 from $28, representing 17 percent downside from Thursday's close. Only one other firm has a sell rating on GE, JPMorgan. The rest of Wall Street either says buy or hold.

Inch cited the company's $31 billion underfunded pension and "inexplicably low" tax rate as additional concerns.

Although he doesn't expect a management change in the short term, the analyst predicted any new CEO will likely lower earnings per share guidance closer to $1.00 than $2.00. The current Wall Street consensus for General Electric 2018 estimated EPS is $1.89.

"In the event of a future leadership succession announcement, we caution the next CEO could opt to significantly reset earnings targets lower: possibly closer to actual cash generation. In turn, we expect the market could be negatively surprised by this prospective reset," he wrote.

General Electric is significantly under-performing the market. The firm's shares are down 9 percent this year through Thursday compared to the S&P 500's 7 percent return.

"We believe GE to be overvalued given weak earnings quality and the wide gap between non-cash and cash earnings," the analyst added.

— CNBC's Michael Bloom contributed to this story.

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