Goldman: Bet against GE, dividend cut is coming

Key Points
  • Goldman Sachs sees "a potential dividend cut to come" for GE, according to a Tuesday report.
  • The firm took the unusual step of recommending clients buy put options on GE that will increase in value if the shares continue to drop.
  • Goldman cut its 12-month price target on GE to $23 from $26.
  • "We see no quick fix to GE's problems," Goldman analyst Joe Ritchie wrote.
An employee of General Electric works on a gas turbine at the GE plant in Belfort, France.
Sebastien Bozon | AFP | Getty Images

General Electric may likely cut its dividend soon as it looks to simplify its businesses and streamline its accounting under a new CEO after years of "financial engineering," according to Goldman Sachs on Tuesday.

"Our fresh look at GE's fundamentals leaves us incrementally bearish, as we see a significant EPS/FCF reset and a potential dividend cut to come," wrote analyst Joe Ritchie in the report.

Ritchie kept his neutral rating, but dropped his 12-month price target to $23 from $26. GE closed Tuesday at $23.19, down nearly 27 percent for the year and near its lowest level in two years.

New CEO John Flannery took over for Jeff Immelt in August and has been aggressively shoring up his executive ranks. Earlier in October, GE said its CFO, Jeff Bornstein, was leaving the industrial conglomerate along with two other key executives. Also, Immelt retired as chairman about two months earlier than expected this month, giving that post to Flannery as well.

"While we expect Mr. Flannery will make the changes necessary to position GE better for longer-term prosperity (shrink to grow), in the interim, we believe the EPS/FCF reset and the prospect of a dividend cut could weigh on the shares," wrote Ritchie.

In an unusual move for a typical Wall Street analyst note, Goldman is telling clients to buy put options on GE which will increase in value if the share price continues to fall. The firm recommends investors buy November put options ahead of the company's Nov. 13 analyst day.

GE's current annual dividend of 96 cents gives it a hefty yield of 4.1 percent, the second-highest in the Dow Jones industrial average behind Verizon Communications. Goldman says the options market is pricing in a cut of the payout to 78 cents in 2018. General Electric wished not to comment on the Goldman Sachs report.

Goldman is the second high-profile Wall Street firm in as many weeks to raise concerns about the GE dividend. Last week, JPMorgan said a cut was "increasingly likely."

Wrote Ritchie, "We see no quick fix to GE's problems as years of financial engineering, complex reporting and mis-aligned incentives are coming to bear."

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Correction: The Goldman report came out Tuesday. An earlier version misstated the day.