GE CEO Jeff Immelt Steps Down: What Dividend Investors Need To Know

General Electric (GE) announced its CEO Jeff Immelt is stepping down on August 1 and will retire from his role as chairman of the board at the end of 2017.

Immelt had served as GE’s CEO for 16 years and wasn’t exactly the most popular executive with investors, to put it nicely.

Questionable capital allocation decisions, the dividend cut during the financial crisis, the lack of capital returned to shareholders, bureaucracy, and non-GAAP accounting complexities are all reasons why GE has been one of the most unloved stocks in America.

In fact, shares of GE have seen their price decline by more than 30% since Immelt succeeded Jack Welch at the end of 2001.

Immelt will be replaced by John Flannery, a 30-year GE veteran with experience running GE Healthcare, overseeing the large acquisition of Alstom, managing GE’s operations in India, playing key roles at GE Capital, and more.

Let’s take a closer look at GE’s leadership change to evaluate what it means for long-time dividend investors and the company’s dividend safety.

Market Reaction

Prior to this announcement, GE’s stock had drifted lower by close to 12% year-to-date, trailing the S&P 500 Index by about 20%.

Investors were frustrated by the company’s weak cash flow generation in the first quarter, Immelt’s recent comments that GE’s 2018 earnings per share target might be out of reach, and weakness in the important oil & gas market.

As a result, GE’s shares were trading at a forward P/E ratio of 16.9, representing a discount to the broader market (17.7 forward P/E) and reflecting lowered expectations.

When combined with investors’ pent-up frustration with Immelt, it’s not much of a surprise to see GE’s stock reacting favorably to the news, climbing by more than 3% in early trading.

However, one effective dividend investing habit is to never make a decision based solely a stock’s short-term price performance. Instead, an investor should decide if the news actually impacts a company’s long-term future and whether that development appears to be fully priced into the stock.

After all, the short-term rise in a stock’s price could be just another overreaction by the market to an event that really doesn’t matter.

Is This Noise or News?

A CEO transition is a big deal. The CEO is in charge of guiding a company’s overall strategy and capital allocation decisions, which can significantly affect the long-term path of a business and the value it creates for shareholders.

GE says that its CEO transition process was set in 2011, so today’s news probably shouldn’t have come as a huge surprise; however, the timing of the transition away from Immelt was likely a bit sooner than many investors expected.

Incoming CEO John Flannery seems unlikely to really rock the boat at GE since he has been with the company for three decades and served in leadership roles that are largely aligned with the company’s current strategic direction (e.g. shedding GE Capital, acquiring Alstom).

I don’t view this change in leadership as a reason to go out and buy GE’s stock, but I think it’s an overall positive for the company as it works to get the most from the business transformation it’s gone through over the last five years.