GE's dividend is safe if 2 things happen, Cowen says (GE)

pulse

April 11, 2018 5:21 PM

GE slashed its dividend already. Good, right? See why it may need to do so again.

GE has had a rough go of things lately, including a restructuring, dividend slash, and SEC investigation.
Shares have fallen more than 50% in the past year.

General Electric's dividend is at risk unless at least one of two things happen, according to Cowen analyst Gautam Khanna.

Shares have cratered more than 56% over the past year, and it seems like there's no relief in sight.

Back in November, the industrial giant announced a turnaround plan that received a tepid reception on Wall Street. The company said it planned to exit legacy businesses like lighting and locomotives to focus on power, aviation, and healthcare equipment. It also announced it was cutting its dividend in half and restructuring its board and compensation programs.

And in late February, GE confirmed it would restate its earnings for 2016 and 2017. The US Securities and Exchange Commission had investigated the company for its accounting of contract assets, which are receivables of revenues that the company recognizes before the cash is actually paid to GE.

Those contract assets are one of two areas of particular concern to Khanna, who projects first-quarter earnings $0.08 a share, which is below the Wall Street consensus of $0.12.

"This lower, truer EPS base partly explains why we don't believe the $0.48/year dividend is safe unless "contract assets" convert to cash on a net basis, and/or the Power market rebounds sharply and soon," he wrote.

He added that his EPS projection could be "even lower if contract assets, a $0.30 plus to C18 EPS, wane."

And his expectations for those assets aren't bullish. "We assume that GE won't recognize sizable, favorable "contract asset" marks in Q1," Khanna said.

He reiterated the second main risk to GE's 3.69% dividend yield is if "power fails to recover." Demand for electricity has dropped of late, a headwind for the power industry.

GE shares are down 27% this year.

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