Industrial Conglomerates

General Electric slashes dividend by 50% as new CEO tries to turnaround 125-year-old conglomerate

Key Points
  • General Electric tells investors it is cutting its dividend in half, to 12 cents a share from 24 cents.
  • CEO John Flannery says the decision was difficult but necessary in light of the company's efforts to find the best ways to use its cash.
General Electric slashes dividend by 50 percent
General Electric slashes dividend by 50 percent

General Electric said Monday it is cutting its dividend in half, a move that could cause many long-time shareholders in the 125-year-old conglomerate to flee but also free up much-needed capital to fund a turnaround for the one-time American bellwether.

said the quarterly payout is being cut to 12 cents a share from 24 cents, effective in December. Shares, which are down more than 35 percent for the year, rose 0.3 percent in premarket trading. At one point, it gained more than 2 percent before the opening bell.

"We understand the importance of this decision to our shareowners and we have not made it lightly," Chairman and CEO John Flannery said in a statement. "We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation."

John Flannery, chief executive officer of GE.
Christopher Goodney | Bloomberg | Getty Images

Flannery took some heat at the investor day presentation, with one attendee telling the CEO that an early proclamation that the dividend was safe "hurt your credibility right out of the gate."

"Fundamentally, that dividend was predicated on us growing to a certain level that we just did not see happening in terms of industrial cash flow," Flannery said.

Heading into Monday's announcement, and as GE's shares cratered, its dividend yield had ballooned to the second-highest in the Dow behind Verizon at 4.7 percent (Verizon's yield is 5.3 percent). That caused many analysts to speculate the payout was unsustainable, which explains why the stock was stable in early trading as this decision was long expected.

The new dividend yield will be 2.3 percent.

GE has paid a dividend since 1899 and has only cut it twice: in 1939 and in 2009.

Wall Street had been expecting some type of action on the dividend, with speculation that GE might opt to eliminate it.

GE's free cash flow, or the level of cash flow less capital expenditures, had contracted to about $7 billion, about half its normal level. The dividend slash is expected to generate $4 billion in cash annually.

"If you look at the last five years, the industrial cash flow of General Electric has not covered the dividend," Jeffrey Sprague, Vertical Research Partners founder and a long-time GE analyst, told CNBC. "That was fine previously when you had GE Capital there to pay its fair share. But with Capital gone, there's just no way to pay the dividend."

The move comes as the company tries to sharpen its focus, under heavy criticism from investors and analysts who believe GE's sprawling interests have become unwieldy and unmanageable.

Among expected changes to the company is a focus on three of the company's prime business lines — aviation, power and health care, according to a report in The Wall Street Journal. There do not appear to be plans for an imminent breakup, but the company is expected to exit most other business lines, the Journal reported.

GE is expected to shed its majority stake in oil and gas operator Baker Hughes, which became a separate publicly traded company in July after it merged with GE's oil and gas operations.

The dividend cut is considered a landmark decision considering GE's tradition as a must-own stock for investors concerned with income generation. The move, along with the company's other troubles, has sparked speculation that GE actually may lose its standing as a Dow industrials component, even though it is the sole original member of the blue-chip index.

However, Langenberg & Co. actually upgraded its rating of the stock to a buy, the first time it has held that view since March 2015. Analyst Brian Langenberg said the dividend cut is already priced into the stock, and he sees GE able to regain some confidence through improved corporate governance.

—With reporting by CNBC's Morgan Brennan.