General Electric's turnaround plan has investors dumping the stock

  • General Electric’s stock dropped as much as 7.1% on Monday after the company outlined its turnaround plan.
  • The company’s earlier announcement that it would cut its dividend sent shares higher initially, but the stock dropped into negative territory once details around the restructuring emerged.
  • GE is looking for a shot in the arm, having fallen 35% year-to-date through the end of last week.

General Electric‘s plan to reconfigure its flailing business is being met with scepticism by investors.

The company’s stock dropped as much as 7.1% on Monday after it laid out a corporate restructuring plan and trimmed full-year 2018 guidance.

GE outlined turnaround measures in an investor presentation, and they included:

  • Focusing on power, aviation and healthcare equipment while exiting legacy businesses like lighting and locomotives
  • Trimming the size of the company’s board
  • Revamping the company’s compensation program
  • Slashing the company’s dividend in half, to $US0.12 a share

And a turnaround is certainly needed. Even before Monday’s drop, the stock had fallen 35% year-to-date, wiping out more than $US100 billion in market value over the period. It’s been a sore spot for the Dow Jones Industrial Average, the 30-company index that counts GE as its worst-performing stock in 2017.

Based on their reaction on Monday, investors are waiting to see how these changes trickle down to the bottom line before building positions.

It was a turbulent morning overall for GE shares, which actually rallied on initial reports that the company was cutting its dividend. It’s possible that investors were thinking that GE would take the money used on dividends and reinvest it into core businesses — a practice they have been rewarding since the start of 2016.

But a couple hours later, once GE chief executive officer John Flannery laid out the rest of the details outlined above and announced the cut to 2018 guidance, the shares took a sharp downward turn.

Gautam Khanna, an analyst at Cowen who has a market perform — or neutral — rating on GE, called the message conveyed by the company “underwhelming.” He is particularly worried about the company’s cash flow throw 2018, despite the scaling-back of the dividend.

Stifel analyst Robert McCarthy was nonplussed by much of what GE laid out, saying that the dividend cut was expected, as was the company’s exit from several key verticals. He too reiterated his hold rating.

In an interesting twist of fate, traders betting against GE missed out on the opportunity to reap huge profits from the stock drop. Short sellers — or those wagering on a share decline — trimmed their position by $US44 million in the two months leading up to Monday’s decline, according to data compiled by financial-analytics provider S3 Partners.

They do, however, still have about $US100 million held short. So going forward, it will be important to keep an eye on how that level changes, to gauge sentiment shifts in GE’s stock.

Get the latest General Electric stock price here.

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