General Electric’s Downsizing Reflects the Tough Reality Facing the U.S. Economy
It’s hard to believe that General Electric Company (NYSE:GE), the darling of Wall Street in the 1990s, a company that has been synonymous with American industrial power and the U.S. economy, has inflicted a major blow to its investors.
More than that, in the long term, GE’s failures represent a microcosm, an example of the difficulties that the U.S. economy will face in the next few years.
But before we consider that process, what happened to GE anyway?
A Rare and Deep Dividend Cut
In what is an extremely rare event for a benchmark of the U.S. economy such as General Electric, the company will now be rewarding investors with a dividend of only $0.01 per share.
Yes, you read that correctly. GE investors who were promised a dividend of $0.12 per share a few months ago will now only get $0.01 per share.
Cutting the dividend is the best that new CEO Larry Culp managed to do since taking over in October.
Many of you might wonder what the big deal is about a corporation cutting its dividend. It happens all the time, after all.
It does, of course. But GE’s drastic dividend cut—literally a tithe—marks the third time the company has cut its dividend since the Great Depression of 1929.
Beware of Investing Because of the Dividend Alone
After GE stock was ejected from the Dow Jones index in June 2018, investors have had to learn a rather unfortunate lesson: it’s not always wise to invest in companies because of their dividends.
Don’t get me wrong. Dividends are great. But no company can continue to deliver them without an underlying source of income and earnings.
Therefore, always pay attention to earnings. Pay even more attention to the behavior of conglomerates like GE under duress.
They often go on a “diet,” shedding and selling off divisions, often focusing on a handful of key domains, to become competitive again.
Sometimes the highway to competitiveness can run into a few obstacles. For GE, the obstacle was Alstom SA (OTCMKTS:ALSMY, EPA:ALO). In 2014, GE acquired the French company’s energy business, which produced some $22.0 billion in losses in the third quarter of 2018.
The U.S. Department of Justice and the U.S. Securities and Exchange Commission (SEC) have opened separate investigations into GE’s unusual step.
Many market observers and investors may have ignored the dividend cut. On Wall Street, however, GE stock has hit rock bottom. The stock at its lowest level since the last financial crisis.
GE Will Survive, But the U.S. Economy Has Changed Radically
Now, I expect General Electric will survive its latest troubles. It’s a big name and still has productive divisions. But the company’s current situation does shed light on structural problems that may affect the U.S. economy in the near future.
“GE has to change,” said Culp to investors. Perhaps what he really meant is that the U.S. economy must change. Part of the problem is good-old-fashioned coal.
President Donald Trump still believes in this old resource, so-called “clean coal.” And GE also believes in coal, as well as other varieties of energy production.
However, GE faces a “damned if you do, damned if you don’t” paradox. Trump targeted GE during his presidential campaign in 2016. He accused the company of having shut down plants and shipping jobs to non-union facilities in Texas or Mexico. (Source: “How Erie Went Red: The Economy Sank, and Trump Rose,” The New York Times, November 12, 2016.)
That said, GE and so many Americans were looking forward to Trump’s infrastructure spending. They expected it to boost GE’s fortunes.
Now that the midterm elections have produced gridlock, it appears unlikely that the Democrats in the House will cooperate with Trump’s spending plans. The House may also obstruct the construction and improvement of coal-fired power plants.
GE is merely one example of Trump’s failed re-industrialization plans. How long can the job growth numbers improve if industrial giants like GE are cutting and slowing down activities?
What Replaced GE in the Dow Jones Index?
And it’s not just the dividend cut that’s the problem with GE stock. When the Dow expelled GE in June, it replaced the historic company synonymous with light bulbs and jet engines with Walgreens Boots Alliance Inc (NASDAQ:WBA).
Yes, that’s Walgreens the drugstore.
GE may yet survive, however, thanks to specialized divisions—especially those involved with its jet engines that propel aircraft from the “Black Hawk” helicopter to the “Boeing 777.” But while these units generate healthy profits, they are not large-scale employers.
The jobs they offer are highly skilled, often requiring years of education. They are also jobs that were not shipped overseas in the first place. In other words, GE has little to gain from Trump’s tariffs.
As such, GE’s situation reveals some unpleasant realities about the U.S. economy in the next few years. The reality is simple: Trump does not have all the answers.
So far, the only thing he’s done is cut taxes. And for most people—the lower and middle classes—the tax cuts won’t last beyond the middle of 2019. More importantly, however, all those jobs that were supposed to come back to America won’t be doing so.
One reason is that the entire nature of the U.S. economy has changed. Walgreens replacing GE as a Dow component represents a glaring example of this phenomenon.
Services Have Overtaken Manufacturing
The service sector has overtaken manufacturing in the U.S economy. Finance, technology, healthcare (as in the insurance and managerial side, which outnumbers the medical practitioners), and other services have become more relevant to U.S. gross domestic product (GDP) than manufacturing.
GE was part of that transformation process. Indeed, as early as the 1980s, the company produced more earnings from its monetary and financial divisions than from its traditional “making things” activities.
Anyone who has ever watched The David Letterman Show on NBC knows that GE owned the NBC network. In fact, Trump knows this very well, given that he and NBC worked together on The Apprentice.
Again, we’re talking about GE, once the world’s largest manufacturing company, making and selling gas turbines, jet engines, light bulbs, airplanes, and appliances of all kinds.
It was GE’s star CEO of the 1990s, Jack Welch, who propelled GE Capital (a finance division to facilitate the purchase of GE-related products since the 1930s) to center stage. GE Capital even sold mortgages.
In fact, GE Capital developed financial interests so large as to rival major banks. Financial services accounted for over 50% of GE’s earnings in 2007.
Anyone remember 2008? The next year, the “credit crunch” swallowed up GE Capital’s many businesses and the stock collapsed.
The fact that General Electric is still around speaks well for GE stock, which, while currently low, has the capacity to rise again. Nevertheless, GE’s situation suggests the U.S. economy has changed too much, for better or worse, for it to sustain the millions of high-paying manufacturing jobs that Trump has promised.