Call of the week: Analyst slaps sell rating on GE, recommends slashing dividend by 37%

Seana Smith
·Host

General Electric (GE) is having a tough time reassuring Wall Street that its turnaround strategy will be successful. The company received a pair of downgrades earlier this week, prompting the stock to close at its lowest level in four and a half years—and shares haven’t recovered since. The stock’s losses were further exacerbated following reports that the company is looking to spinoff parts of its business.

The two downgrades were issued by UBS and Morgan Stanley. UBS lowered its rating on the stock to neutral from buy with a price target of $24 a share, while Morgan Stanley cut its rating from equalweight to underweight and lowered its price target to $22.

In a note to clients, Morgan Stanley analyst Nigel Coe wrote that the challenges CEO John Flannery faces are “greater than even we had imagined,” and the team now believes GE’s “dividend will have to be adjusted down to reflect substantially lower earnings power.” The firm recommends GE reduce its dividend from $0.96 to closer to $0.70, which would be a 37% cut.

Although General Electric is by far the biggest loser in the Dow so far this year, a sell rating on GE isn’t too common, and that’s why Morgan Stanley’s bearish call caught some investors by surprise. The stock has erased more than $94 billion from its market cap in 2017 and is down about 34% since the start of the year.

Now the question is if CEO John Flannery, whom Morgan Stanley interestingly called “the right man for the mission on hand” when downgrading GE, will spin off a portion of the company’s business. According to the Wall Street Journal, GE’s considering breaking off its railroad business, while Reuters reports that it’s exploring a sale of its transportation and health care information technology businesses. If GE does decide to divest one or both of these divisions, it will help the company get closer to its effort to exit more than $20 billion of assets over the next two years, a move highlighted by Flannery during GE’s earnings call October 20.

General Electric was last trading down 2.2% at $20.86 on Friday.