"Control your own destiny or someone else will" Jack Welch former CEO GE

The mini-run of five consecutive up days for the S&P 500 looked like it was to be extended on Monday until GE appeared to spoil the party. General Electric was a blue-chip company that would have been considered part of any long-term investors portfolio but has for years failed to deliver shareholder value. The share price is less than half what it was in 2000. The company is well diversified in many different areas, oil and gas, financial services, power, and medical so in theory, should be well exposed to the global economy.

 The stock price fell 6% on Monday night as analysts suggested that the dividend may need to be cut after the third quarter results missed analyst forecasts by some margin. The dividend growth has been slowing over the past few years and has been virtually negligible in the past couple, a further clue to the strength of the underlying business. It is also interesting to note that GE bonds had been underperforming their peers this year. It never ceases to amaze how a company as broadly researched as GE that, so many well-paid analysts can be so wide of the mark on earnings day.

Once the implications of the results worked their way into the market, equity prices in the US fell and the run was broken. The S&P 500 ended losing almost 0.5% on the day. A company with the pedigree of GE possibly facing a dividend cut reminds investors that the fact a yield looks too good relative to the risk-free rate, that there may be a risk to the dividend. Jack Welch, for many years the CEO of GE and synonymous with the growth of the company. In his time from 1981 to 2001 the share price rose 4000pct, must be disappointed with the way the ship has been run post his retirement, or perhaps the legacy he left was not one that is able to thrive in the modern era. 

The Vix rose, traded back above 11, suggesting that GE’s announcement has ruffled confidence a little. Corrections in bull markets, and this one has been longer than many in history without a noticeable correction, can be caused by what seems an insignificant event at the time. There is no reason to suggest that GE will be the catalyst, however, should there be one General Electric’s 3rd quarter earnings could be in the frame.

GE did appoint a new CEO in the summer and he may have decided to indulge in something of a kitchen sinking exercise in these set of results. Looking ahead one suspects, this ship has spent several years being thrown about, and like many ships when they eventually hit the rocks they break up. Value investors may be looking at the possibility for the spare parts to be recycled, the company also has an activist shareholder who will also be looking for value to be created from the storm hit vessel.

Posted on October 24, 2017 .