GE’s Dividend Cut Tempest In ETF Teapot

November 15, 2017

On Monday, General Electric slashed its dividend 50%, from $0.96 to $0.48. By dollar value, it's the eighth-largest cut in the history of S&P 500 companies, according to CNBC; if you ignore dividend cuts made in 2009, post-financial crisis, then it's the largest of all time.

The admittedly shocking move has panicked some investors, who now wonder if and how they ought to retool their dividend ETF allocations in response.

There's no need for worry, however. For dividend ETF investors, this news is a tempest in a teapot.

Dividend Cuts Rare Among S&P 500

GE's new annual dividend will be $4.2 billion for 2018, down from a previous $8.3 billion.

Dividend cuts, which signal a company's weakening financial position, are infrequent among S&P 500 members. As of last Friday, only 10 firms, including GE, had slashed dividends this year. Contrast that to the 310 dividend increases this year, which put $36.3 billion into investors' pockets.

S&P 500 companies were 34 times more likely to have raised dividends this year than cut them, according to Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA: "General Electric has gone against the recent norm for S&P 500 constituents," he said in a research note Monday.

General Electric Stumbles

For decades, GE belonged to a class of companies whose fortunes once dictated America's; where they went, so too did the rest of the country.

But the modern GE is a sprawling, directionless beast, an industrial behemoth dragged down by poorly executed acquisitions and unnecessary business lines. GE was once the largest company in the U.S. Today it doesn't even crack the top 10; GE's market capitalization is now just $155 billion, less than a fifth that of Apple.

Furthermore, this week, CEO John Flannery admitted the company had been paying out a dividend that was higher than its total free cash flow for years.

It's a reminder that “stalwart” doesn't mean “everlasting”; and like Shelley's Ozymandias, even titans one day may fall.

Nothing Lasts Forever

"While investors tend to expect that dividend payments are in perpetuity, cuts can and do happen among even well-known companies," said Rosenbluth. He cites JPMorgan Chase, Pfizer and Wells Fargo as other companies that have cut dividends over the past decade.

"To offset this risk, dividend-focused ETFs and mutual funds are commonly used by investors to gain diversified exposure to equity income," he added.

Dividend ETFs contain dozens, even hundreds of companies, spreading out the risk that a cut in any one company's dividends could imperil one's income. That diversification is key; as it is, GE's cut is likely to barely blip dividend ETFs at all.

 

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