General Electric's turnaround plan will require the company to cut its quarterly dividend again if it is going to reduce risk and position itself for new growth, J.P. Morgan analyst Stephen Tusa said in a note Monday.
The industrial conglomerate needs "$30 billion in cash" to pay off enough of its debt to match expectations from ratings agencies, Tusa said. GE already cut its dividend in half last year, from 24 cents per share. CEO John Flannery would not comment to analysts at an industry conference on May 23 about whether the company would cut the dividend in 2019. He said GE will "have to see how this plays out."
"We expect to learn a lot more about the 'change' agenda soon," Tusa said. He said he believes Flannery's team "still has the benefit of a clean slate" to lay a foundation for the future. Tusa added a caveat that there is "little wiggle room," as he said he doubts "investors will be patient in [the second half of 2018] if the breaks don't go GE's way."
"The bottom line is that we see the need to de-risk substantially, which includes the need for cash and a cut to the dividend to help with operational de-levering," the analyst wrote.
GE shares were down 1.3 percent Monday afternoon while the S&P 500 rose.
J.P. Morgan holds the lowest price target on Wall Street for GE's stock at $11 per share. Tusa has steadily cut his price target, citing high risk and Flannery's 2018 earnings forecast of $1 per share as not "credible" because it does not include restructuring costs. After GE's first-quarter earnings in April, Tusa said there was "absolutely no change" to the firm's thesis, despite an overall number that was better than expected.
GE continues to be the worst performer among the components of the Dow Jones industrial average, down more than 49 percent over the last 12 months. The next worst, Procter & Gamble, is down just over 16 percent.
The current situation "is not set to improve quickly under the current plan," Tusa said. He thinks "the time is right" for Flannery to present "a new long-term plan, as long as it's achievable and conservative."
GE may start by "monetizing" Baker Hughes GE, an oilfield services company that J.P Morgan estimates would bring in "around $20 billion," Tusa said.
"But it would still leave the need for another $10 billion in debt reduction to get to ratings agencies' targets, which we consider a 'minimum,'" Tusa said.
While Tusa may have the most pessimistic view of GE's stock, other analysts gave repeated caution after GE's first quarter that the worst may not yet be behind the industrial conglomerate. Cowen slashed its price target in April, to $12 from $15 for GE shares, calling it a "show me" stock. Analyst Gautam Khanna wrote at the time that Cowen "does not believe the 48 cents per year dividend is safe" until GE can turn contract obligations into cash "on a net basis" or its beleaguered power business "rebounds sharply and soon."
As a whole, Tusa said GE must begin "making communications to the investor community clearer." He said Flannery's team disseminated information in a way that was "disjointed and difficult to verify on many accounts." Flannery is claiming to be turning a new page at GE but "selectively telling just some aspects of the story" is a habit "similar to the past," Tusa said.