General Electric Dividend Cut Likely In The Works

After more than a decade of underperformance, General Electric Company GE may have finally found the right CEO to lead the company into its next era of prosperity. Unfortunately for GE investors, Morgan Stanley has downgraded GE stock from Equal-Weight to Underperform and said on Monday that there could be more pain ahead for GE in the near term.

According to analyst Nigel Coe, GE will need to majorly reset 2018 earnings expectations heading into its upcoming shareholder update coming in November. Morgan Stanley has cut its 2018 EPS estimate from $1.40 to $1.06, and Coe says a dividend cut is likely as well.

“We believe investors need to take action to protect against the possibility of near term underperformance in the event of a dividend cut in November and this is clearly an additional factor in our rating change,” Coe wrote.

Despite the fact that GE stock is down another 28 percent year to date, Coe said the downside associated with a dividend cut is not yet fully priced into the stock.

Coe said long-term investors should rest assured that new CEO John Flannery is the right man to take on the daunting task of righting the GE ship. However, his turnaround may require GE to dial back its capital return, a decision that the market may not take kindly.

Coe said even optimistic GE bulls need to keep earnings expectations in check. He said the possibility of GE earning $1.40 per share in 2020 would be a “pretty heroic recovery.”

Coe said GE should cut its current 96-cent dividend to around 70 cents. In addition to the downgrade, Coe lowered his price target for GE stock from $25 to $22.

At time of publication, shares of GE were down 5.14 percent at $22.60.

Related Link: Has General Electric Finally Found A Capitulation Bottom?