General Electric slashed its quarterly dividend Tuesday to just a penny a share starting in 2019, the second dividend cut in a year and a dramatic move by new Chairman and CEO Larry Culp to free up cash for the beleaguered company once treasured by shareholders for its payout.
The dividend cut came as GE reported adjusted third-quarter earnings of 14 cents a share, 6 cents below Wall Street forecasts collected by Refinitiv. Revenue for the quarter fell 4 percent to $29.57 billion, also less than expected. On a GAAP basis, the company lost $2.63 a share in the quarter.
"Fundamentally this is worse than expected on profits," J.P. Morgan's Stephen Tusa said in a note to investors after the report.
The company also said it will divide its ailing power division into two units, with the business segment taking much of Culp's attention in his first month on the job. GE took a $22 billion noncash charge in the third-quarter related to acquisitions made in the power business.
GE said on the conference call with shareholders that the SEC was expanding the scope of its ongoing accounting investigation of the company to include that goodwill charge. GE stock fell as far as $9.87 a share in Tuesday trading, closing down 8.8 percent at $10.18 a share in the worst day of trading since March 2009, despite an initially positive reaction to the earnings report and dividend cut.
The industrial conglomerate expects to retain about $3.9 billion in cash a year as a result of the dividend cut. While Wall Street analysts have speculated GE may raise capital after a dividend cut to give a buffer for the company's future, Culp dismissed that idea on the company's conference call, saying GE has "no plans for an equity raise."
"The dividend cut to close to zero will help on this front, but we also don't think the cut is a silver bullet, and the severity highlights the challenged capital position here," Tusa said.
The quarter's results were "far from our full potential," Culp said in a statement after the first earnings report under his leadership. He called for a heightened "sense of urgency" and increased "accountability across the organization to deliver better results."
GE's aviation business remained strong in the quarter, posting a 25 percent increase in profits from last year. But J.P. Morgan does not "believe Aviation can sustain these types of results," Tusa said, especially since the power business "is bad and certainly nowhere near as salvageable as Bulls think."
"There is still much information to come and wood chop for the new CEO," Tusa added.
Culp and GE have "no room for error," said Gordon Haskett analyst John Inch. The company's business of selling turbines to gas and coal-fired power plants had already been suffering in recent years as utilities ramped up construction of solar and wind farms. GE's power division will be reorganized as a gas products and services business and a business of power's remaining assets of steam, grid solutions, nuclear and power conversion.
Appointed on Oct. 1, Culp was brought in after former CEO John Flannery frustrated the GE board with his slow pace of change. GE announced Oct. 12 it would delay its third-quarter report by five days to give Culp a full month to catch up. GE expects to fall short of its previous guidance for both earnings and free cash flow in 2018 but did not include an update to its guidance in the quarterly report.
"If the aviation business cracks in the slightest, watch out below," Inch said. "It is going to take a very, very long time to turn things around."
"Although I agree with the decision to eliminate the dividend because they certainly need that extra cash for restructuring and dealing with liabilities like a dramatically underfunded pension, this is going to be painful for those individual shareholders who live on their dividend," Jack Degan, chief investment officer at Harbor Advisory and longtime GE shareholder, said on CNBC's "Squawk Box," citing retired workers.
But Degan called the dividend cut "bold action" by Culp and said it's a sign "we're going to see more bold action with the portfolio."
Correction: GE's aviation business posted a 25 percent increase in profits for the third quarter. An earlier version misstated the percentage.