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Monday, General Electricity Company (NYSE: GE) CEO John Flannery has finally briefed investors on his strategic plan for the company, and by now most investors will know it’s about halving the annual dividend yield to $ 0.48. The drop in dividend is painful, but if it helps get the company back on track and the stock price appreciates accordingly, most investors would be happy. Indeed, Flannery took center stage on the update conference call to convince shareholders that he is the man for the job. However, by analyzing the presentation, it becomes clear that the person responsible for executing the plan will likely be someone else. Let’s take a look at the main takeaways from the update and find out who that person is.

General Electric Company’s investment outlook depends on its electrical segment. Image source: General Electric Company.

1. Profit guidance

Since the disastrous set of third quarter results, investors have been eagerly awaiting GE’s investor update to see where earnings and, in particular, cash flow will go in 2018. Cash flow projections for GE for 2017 implied it wouldn’t. capable of covering the distribution of the dividend from its single generation of cash flow, but what would 2018 bring?

Starting with earnings, adjusted industrial earnings per share (excluding pension expense and GE Capital items) in 2017 should still be between $ 1.05 and $ 1.10, but Adjusted EPS in 2018 is expected to be between $ 1. $ and $ 1.07, implying a mid-point drop.

2. Direction of cash flow

However, the really interesting news comes from the cash flow forecast. (It gets a little complicated, so take a deep breath and I’ll explain it to you.) GE reports industrial cash flow from operations (CFOA) because it’s a good way to measure ongoing performance. For reference, the industrial CFOA is the CFOA of GE excluding GE’s capital dividend – useful to know because GE sold its capital business in an effort to focus on its industrial core.

However, that doesn’t stop at the industrial CFOA, as GE still has to make capital expenditures for plant, property, plant and equipment (PP&E) and also to fund pensions and pay transaction taxes. PP&E are an integral part of running a business and are always taken into account when calculating Free Cash Flow (FCF), but pension funding and transaction taxes are not recurring.

Management wants investors to focus on the industrial CFOA and FCF at all times, which is why I have highlighted them in the guidance table below. As you can see, there is an expected year-over-year improvement for both measures in bold, and industrial FCF’s $ 6-7 billion forecast should cover the dividend payout of 4.2. billion dollars (or $ 0.48 per share) in 2018. news.

However, note that once the pension funding is paid, GE’s cash available for dividends from operating activities will actually be less than it will be in 2017. In addition, Flannery said GE is borrowing money. money to finance retirement. However, you can think of it another way: GE borrows money to support the dividend.

Metric

2017 estimate (in billions)

2018 estimate (in billions)

GE CFOA excluding tax and pension deal

$ 11 *

$ 9 to $ 10 *

GE capital dividend

$ 4

$ 0

Industrial CFOA excluding tax and pension deal

$ 7

$ 9 to $ 10

EAR

$ 4.1

$ 3

Industrial FCF excluding tax and pension deal

$ 3

$ 6 to $ 7

Taxes on pensions and transactions

$ 2

$ 6

Cash flow after pension funding

~ $ 1 *

$ 0 to $ 1 *

Data source: General Electric Company presentations. * Based on the author’s assumptions. Calculations by author.

3. Upcoming disposals

Flannery had previously announced that he planned to divest $ 20 billion in assets, but in the presentation he named them. This concerns in particular the agreement for the sale of the GE Industrial Solutions activity to ABB – a company whose margins suggested GE had not run it well – as well as exploring the sale of its transmission and power and lighting assets. Meanwhile, the sale of the stake in Baker Hughes, a GE company is also under consideration.

While the potential exits, sales, or spinoffs unleash value, remove significant oil and gas exposure, and focus GE on its industrial core, it should be noted that selling these companies would further reduce the CFOA. In addition, transport and lighting are professions with a high level of cash generation. In fact, they convert over 100% of net income to FCF, an impressive figure, especially when compared to GE’s forecast of only 60% FCF conversion for the electricity segment in 2018.

4. Strategic change

Flannery’s willingness to explore options with Baker Hughes and his recognition of the problems in the electricity segment – including disappointment over the acquisition of Alstom’s energy assets – is a clear reason why former CEO Jeff Immelt has left the company.

Immelt was the primary decision maker in GE’s oil and gas bet, with the company making a series of acquisitions during a period of much higher oil prices. Likewise, the Alstom deal was reached before it became clear that the electricity market was going to deteriorate. Clearly, Flannery has been made to perform better, especially with the struggling GE Power segment, and he has pointed to his track record of managing GE Healthcare as proof of his ability to do so.

5. GE Power’s Russell Stokes is the man to watch

GE Power’s new president and CEO may well be the person investors need to pin their hopes on. If GE is to pull out of a $ 20 billion company and eventually sell its assets to Baker Hughes, then energy technology will likely become an even bigger part of the company’s business.

Additionally, this is the most troubled segment of GE’s operations, and one where investors will want to see improved margin and cash flow, not least because divestitures elsewhere could put pressure on overall CFOA production. in the future.

All in all, the investor update highlighted GE’s current and future reliance on its electric segment. Now Stokes and Flannery have to get him back on track.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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