General Electric Co. chief executive John Flannery indicated that it would take at least a year for his turnaround plan to start paying off. Many investors are deciding not to stick around.
GE’s stock fell almost 6 percent on Tuesday, adding to the more than 7 percent drop on Monday that occurred after Flannery laid out a plan to streamline the Boston-based company and cut its dividend in half.
“Today, you just had a lot of investors react as though they didn’t need to be here, it’s too hard to figure out, or they didn’t see enough to make them believe,” said Nick Heymann, an equity analyst with investment bank William Blair & Co.
GE’s stock closed at $17.90, its lowest price in nearly six years, and is down 43 percent for 2017, compared to a 15 percent increase in the Standard & Poor’s 500 index. The 125-year-old company, the last original member of the Dow Jones industrials, has shed $119 billion in market value this year. That is about the same as the market capitalizations of Biogen and Raytheon combined.
The flailing stock price underscores the challenges that Flannery faces as he tries to restore GE’s luster. He took over from Jeff Immelt in August and immediately embarked on an effort to simplify the sprawling conglomerate.
The dividend cut was just one element of the broad initiative that Flannery unveiled on Monday. Flannery wants to trim the board’s membership from 18 to 12 people, and closer tie executive compensation to stock performance. He is also jettisoning as much as $20 billion worth of business lines — the diesel train engine business and the Boston-based Current energy-and-lighting group joined the list of pending divestitures — and is trimming at least $3 billion in expenses from the company over two years.
The overarching goal is to focus on three sectors where GE can lead: aviation, health care, and power.
Immelt dramatically reshaped the company during his 16 years as CEO by focusing on industrial businesses, and related software that can make machines run more efficiently. Flannery is trying for another dramatic reinvention, but in a much shorter time period.
Flannery told reporters on Monday that he wasn’t surprised that the stock fell after his investor update. It was to be expected, Flannery said, after the major dividend cut and a big reduction in the company’s earnings forecast. But he said he hopes investors pay attention to his underlying strategy of concentrating on the business lines with the strongest potential.
“We had disappointing news today, there’s no sugarcoating that,” Flannery said. “Going forward, investors should look at the other parts of the story. . . . This is not a Monday, Tuesday thing. We’re running the company for a new era.”
RBC Capital Markets analyst Deane Dray issued a note downgrading GE’s stock on Tuesday, saying his team now believes that GE’s turnaround will take much longer than previously anticipated. Flannery’s plan, Dray wrote, stopped short of the dramatic reshaping many on Wall Street had hoped for. The bulk of the company, which generated more than $120 billion in revenue last year, remains intact under Flannery’s plan.
Dray attributes the stock losses this week to a number of disappointments and “unsettling disclosures,” particularly with regard to GE’s power division and the struggle to integrate the $10 billion acquisition of Alstom’s energy businesses into that unit. The 50 percent dividend cut — from 96 cents per share a year to 48 cents a share, aimed at saving $4 billion-plus annually — served as a painful reminder that GE is struggling to generate an adequate flow of cash.
“The bottom line is that Mr. Flannery’s plan fell short of the sweeping reset that investors were looking for,” Dray wrote. “In our view, there were very little new or bold ideas among the divestiture targets announced and no meaningful changes to the business model or quality of earnings.”
Flannery is also pledging to simplify GE’s approach to reporting its finances. But Heymann, the William Blair analyst, said the new financials released on Monday were still extremely complex and opaque.
“People are clearly having challenges understanding the dynamics associated with GE’s numbers,” Heymann said.Jon Chesto can be reached at email@example.com. Follow him on Twitter @jonchesto.