GE Options Are Pricing In Massive Dividend Cuts

GE shares are languishing at more than four year lows (as the broader market soars to record highs) and GE credit risk stands at 8 month highs (almost double the post-crisis lows hit in June). As Goldman analyst Joe Ritchie warns, a significant earnings per share/free cash flow reset looms and the prospect of a dividend cut is dragging the stocks lower.

Ritchie says he would “ideally want to get more positive” with the stock hitting 52-week lows and sentiment at its most bearish since initiating coverage four years ago, however, a fresh look at fundamentals “leaves us incrementally bearish.”

Expects new CEO John Flannery to make changes necessary to position the company better for longer-term prosperity.

GE’s stock dividend yield has never been so high to its corporate bond yield…

And as Susquehanna’s derivative strategist Chris Jacobson notes, GE options are pricing in a dramatic cut in dividends in the next few years.

In fact, GE options are implying ~71c of cumulative dividends between now and January 2019, compared with the ~$1.20 that would be expected without any action.

As Chris Whalen recently noted, traders continue to puzzle over the latest management changes at General Electric Co, the once iconic symbol of American industrial prowess.Over the past year, GE’s stock price has slumped by more than 20% even with the Fed’s aggressive asset purchases and low rate policies.  Just imagine where GE would be trading without Janet Yellen. 

To be fair, though, much of GE’s reputation in the second half of the 20th Century came about because of financial machinations more than the rewards of industry.A well-placed reader of The IRA summarizes the rise and fall of the company built by Thomas Edison:

“For years under Welch, GE made its money from GE Capital and kept the industrial business looking good by moving costs outside the US via all kinds of financial engineering.Immelt kept on keeping on. That didn’t change until it had to with the financial crisis.No matter what, untangling that kind of financial engineering spaghetti is for sure and has been a decade long process.No manager survives presiding over that.Jeffrey Immelt is gone.”