The General Electric Company, aka, GE (NYSE: GE) has had a dismal free cash flow (FCF) for over a year, but it's primarily been ignored by investors. DIY Stock Investor first made notice of the disparaging cash flow issue in Q2 2016. Jim Cramer recently spoke with Squawk on the Street admitting cash flow is the problem, but he still hasn't given up on his affection for the CEO, John Flannery.
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CEO John Flannery can be held in high regard, but the fact still remains their debt is troubling. Versus competitor Honeywell International, Inc. (NYSE: HON), GE's long term debt is shocking. At the end of Q3 2017 GE's debt was $136 billion. That is nearly 3/4 of their market captial of $190 billion. Honeywell had a long term debt of $11.5 billion for a simple 10% of their market capital. Look at GEs annual declining cash reserves and the lack of FCF yield; it becomes obvious why they sell off company divisions.
When they sell, the cash pile jumps and it appears they could make a dent in the debt, except they continue to pay a dividend that saps most of their free cash flow. Plus, it's a marathon endeavor to pay down $136b in long term debt to a reasonable level.
Also read, "Is The $136 Billion Debt Of General Electric A Deterrent?" at Seeking Alpha.
According to the charts in the company's Q3 presentation, nearly 100% of their operating cash comes from their financial services, aka, GE Capital. See the snippet below:
Analysts have speculated the dividend will be discontinued. A cut dividend could add to further sell-off and downward action of the stock price. The quarterly dividend of $.24 per share is a $2b expense each quarter or $8b annually. At this rate, they'd have to barrow or tap reserves to pay the dividend.
GE's Q3 financial statement has posted to their website but they've yet to file form 10-Q with the SEC. The earnings call and commentary adds for better analysis. It appears they had nearly $7b in Operating Cash Flow (OCF) at the Q3 mark. They had talked about $4b in CapEx for an estimated free cash flow (FCF) of $3b. The FCF Yield for GE is approximately 1.58% (Market Capital). The yield in relation to Enterprise Value is 1.03%. This yield is less appealing than Honeywell's 2.74% of EV.
Free Cash Flow is obtained by taking the value of the company's operating cash flow and subtracting from it the value of capital expenses. The yield is then formulated by dividing the result by either the market capital or enterprise value.
Disclosure: I/we have no positions in GE, HON, and no plans to initiate any positions within the next 72 hours.