Heading into 2018, General Electric (GE) seemed to enjoy solid prospects for the year. The company had already completed a much-publicized 50% dividend cut, and the former CEO, Jeff Immelt, had been removed. In Immelt's place was John Flannery, the former president and CEO of GE Healthcare. Further, though the company's stock had fallen by nearly 50% over the course of 2017, it seemed to plateau somewhat heading into the new year.
Unfortunately for GE and its investors, however, 2018 has not managed to meet optimistic expectations. Indeed, the most recent year has perhaps been one of the very worst for the beleaguered company. As of this writing, the company has lost more than 58% of its stock value year-to-date for 2018. Below, we'll explore some of the biggest news from GE in 2018 and examine the impact these events had on the company's performance.
$6.2 Billion Insurance Charge
Even the first few weeks of 2018 set the year off on the wrong foot for GE. In January, Flannery revealed a $6.2 billion insurance charge which the company had previously not foreseen. This charge came about because of GE Capital's reinsurance liabilities, and it is unfortunately not the last time that these liabilities will impact the company. In fact, GE Capital is likely going to need to allocate about $15 billion to fund these liabilities through 2025. The impact of this is enormous: GE's dividend payments will likely suffer as a result of a lack of support from the company's Capital arm.
Booted Off the DJIA
In June, the Dow Jones Industrial Average (DJIA) decided to remove GE's stock from its 30-name index. Dow officials replaced GE with Walgreens Boots Alliance, Inc. (WBA). The reason for the shift had to do with the fact that, even midway through the year, the price of GE's stock had plummeted by about 25%. GE's significant debt load, more than twice its market cap, dragged down investor interest. The company's power unit also generated poor earnings in the first two quarters of the year, exacerbating the stock's slide. GE has also seen its credit rating plummet this year, falling two levels to BBB+.
In an effort to improve GE's prospects, the company dramatically changed its baord membership in April. The board was cut from 18 members down to 12, three of whom were brand new to the company. In the process, Flannery was eventually pushed out as CEO. In October, the board voted unanimously to replace him with new board member and former Danaher CEO Larry Culp. Culp immediately cut the company's quarterly per-share dividend to just a single cent. Along with multiple instances of downward revisions to the company's performance expectations, the dividend trimming quickly undercut optimism for the company's new direction which had briefly been reflected in a stock price boost.
Inaccurate guidance from GE leadership has no doubt contributed to a loss of enthusiasm and trust among the company's investors. Early in 2018, GE management forecasted earnings per share between $1 and $1.07, with free cash flow of somewhere between $6 billion and $7 billion. With declining earnings and cash flow, those forecasted figures had to be revised. After the first quarter, guidance was trimmed; it was nudged downward again for the second quarter as well. After a dismal set of third quarter figures, the company declined to even provide numbers for fourth-quarter guidance.
One of Culp's primary goals as GE's new head is to subdue the company's extensive debt load. Early in November, Culp sold off a portion of the company's stake in oilfield services company Baker Hughes in order to raise roughly $4 billion. GE later sold off various loans and leases related to healthcare equipment. In the process of selling these assets to TIAA Bank, GE raised another $1.5 billion or so.
Culp's decision to sell off various of GE's assets was not a new one. Indeed, previous CEO Jeff Immelt had previously sold off much of the company's financial services operations as well. Prior to his removal as CEO, Flannery also revealed plans to trim many of GE's enterprises as well. In April of 2018, GE Healthcare sold its IT business to Veritas Capital for just over $1 billion. Just weeks before 2019, GE revealed plans to IPO GE Healthcare, opening up one of the largest public healthcare companies in the world to public investment.
GE has maintained that it is not suffering from near-term liquidity concerns, as it has roughly $40 billion in bank lending facilities established and only about $2 billion drawn down.
The sales of GE assets point to one of the company's biggest ongoing challenges, and one that is sure to continue to dominate the company's news heading into 2019. GE, which grew into a massive conglomerate under the leadership of Jack Welch in the 1980s and 1990s, is working to streamline its operations. GE plans to sell off portions of its healthcare and life sciences divisions in the near future in an effort to reduce its weight and make itself more financially viable. The company's remaining Baker Hughes holding, valued at about $13 billion, may also be up for sale in the coming weeks or months.