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Goldman: GE Should Suspend Dividend for Next 18 Months

Goldman: GE Should Suspend Dividend for Next 18 Months
 Jonathan Weiss| Dreamstime.com

By    |   Saturday, 23 June 2018 03:32 PM

Goldman Sachs has recommended that General Electric Co. suspend its dividend for the first time in 119 years.

"We think the most prudent action would be for GE to consider suspending its common dividend for the next 18 months," Goldman Sachs analyst Joe Ritchie wrote cited by CNBC.

"GE is in a challenging situation," Ritchie wrote, adding that putting the dividend on hold would save the company $6 billion that can be used to pay down debt.

The firm said a dividend suspension would solve the two risks GE faces of a dividend cut and a credit rating downgrade "without sacrificing the long-term."

Goldman’s unsolicited advice came just days after the once-mighty conglomerate suffered a crowning ignominy as overseers of the Dow Jones Industrial Average kicked the beleaguered company out of the stock gauge it has inhabited for more than a century, Bloomberg reported.

Once the world’s most valuable company, GE will be replaced by Walgreens Boots Alliance Inc., the Deerfield, Illinois-based drugstore chain created in a 2014 merger. The change will take effect prior to the open of trading Tuesday.

Down more than 25 percent, General Electric (GE) stock is the worst performer in the Dow in 2018, as it was last year, as well.

The embattled industrial conglomerate cut its dividend in half on Nov. 13, to 12 cents per share from 24 cents per share.

GE stock sank 45 percent in 2017, compared with a 25 percent gain in the Dow, as it struggled with weak demand for industrial products from gas turbines to locomotives and oilfield equipment. Its shares fell as low as $12.67 after the announcement Tuesday, which would be its lowest closing price since 2009.

“We are focused on executing against the plan we’ve laid out to improve GE’s performance,” the company said in a statement. The company said the removal from the DJIA “does nothing to change those commitments or our focus in creating in a stronger, simpler GE.”

GE has been by far the worst in the Dow for more than a year while contending with weak demand for industrial equipment and cash-flow challenges. The troubles deepened in January with the news that U.S. securities regulators were probing the Boston-based company’s accounting.

The change means the last original Dow member has finally been removed from the benchmark formed in 1896, with GE joining the likes of Distilling & Cattle Feeding, National Lead, Tennessee Coal & Iron and U.S. Rubber. GE briefly left the index, but has been in it continuously since 1907.

Meanwhile, the ouster from the Dow isn’t seen by everyone as a fatal investment blow.

While the Dow index of 30 top-shelf U.S. corporations is arguably more well known, professional investors bet much more money on what happens to the S&P 500, an index in which the one-time leading U.S. company has only a tiny influence, Reuters explained.

GE’s drop from the Dow will thus likely not pose a risk of wide selling pressure by indexed investment funds.

“There’s only a small group of investors who actually target their investing to the Dow Jones Industrial Average,” said Rick Meckler, a partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey. “All in all, I don’t think it’s meaningful to investors.”

While negative sentiment caused by the elimination of the company from the Dow could lead to more selling of its shares on Wednesday, investors predicted that GE’s removal would prompt little reaction from major investment funds.

“Symbolically, this indignity marks GE’s fall from grace,” said analysts at RBC. “However, given that the DJIA is a price-weighted index, GE now represents less than one-half of a percent of the overall index with its current stock price sitting below $13.”

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Goldman Sachs has recommended that General Electric Co. suspend its dividend for the first time in 119 years.
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Saturday, 23 June 2018 03:32 PM
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