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.

 

Dividend ETFs Don't Hold GE

In total, ETF.com classifies 147 funds as "Dividend ETFs." But looking at the ones that could potentially hold GE—that is, no ex-U.S. funds, only large-cap/total market ETFs, no REITs or other irrelevant themes, and so on—narrows the field considerably, down to just 56. (We also disregard exchange-traded notes (ETNs), which are bank notes that follow an index and don’t hold individual stocks.)

Of those 56 ETFs, just 24—or less than half—have any stake in GE whatsoever. They're listed in the table below:

 

Dividend ETFs That Hold General Electric
Ticker Fund AUM % GE of
Holdings
VYM Vanguard High Dividend Yield ETF $20.12B 2.18%
DVY iShares Select Dividend ETF $17.11B 0.31%
FVD First Trust Value Line Dividend Index Fund $4.03B 0.45%
SPHD PowerShares S&P 500 High Dividend Low Volatility Portfolio $3.01B 1.28%
SDOG ALPS Sector Dividend Dogs ETF $2.25B 1.60%
DLN WisdomTree U.S. LargeCap Dividend Fund $1.99B 1.22%
QDF FlexShares Quality Dividend Index Fund $1.83B 1.51%
FDL First Trust Morningstar Dividend Leaders Index Fund $1.66B 4.29%
DHS WisdomTree U.S. High Dividend Fund $1.21B 1.87%
DTN WisdomTree U.S. Dividend ex-Financials Fund $870.57M 0.62%
DTD WisdomTree U.S. Total Dividend Fund $608.03M 1.03%
OUSA O'Shares FTSE US Quality Dividend ETF $425.48M 1.27%
LVHD Legg Mason Low Volatility High Dividend ETF $425.38M 1.84%
QDEF FlexShares Quality Dividend Defensive Index Fund $315.29M 0.58%
SPYD SPDR Portfolio S&P 500 High Dividend ETF $232.06M 0.96%
FDRR Fidelity Dividend ETF for Rising Rates $199.19M 0.90%
DEW WisdomTree Global High Dividend Fund $101.21M 1.70%
FDVV Fidelity Core Dividend ETF $71.47M 0.33%
QDYN FlexShares Quality Dividend Dynamic Index Fund $58.73M 2.33%
JDIV JPMorgan U.S. Dividend ETF $24.97M 0.38%
DJD Guggenheim Dow Jones Industrial Average Dividend ETF $11.40M 3.72%
RNLC First Trust Large Cap U.S. Equity Select ETF $8.33M 0.14%
RNDV First Trust U.S. Equity Dividend Select ETF $5.20M 1.14%
DIVB iShares U.S. Dividend and Buyback ETF $2.50M 1.73%

Source: ETF.com. Data as of Nov. 14, 2017

 

But A Scratch

What should be obvious is that the stake these dividend ETFs do have in GE is minimal, at best. Only seven funds even make the company a top 10 holding. The fund with the largest holding, the First Trust Morningstar Dividend Leaders Index Fund (FDL), holds a whopping 4.29%. But even that is far above the mean; GE's average weight in these 24 ETFs is a paltry 1.39%.

So these ETF investors can safely put down the panic button, because GE doesn't determine the returns of any dividend ETFs on the market. At best, it's a glorified seat-filler. The real drivers of returns are tech stocks like Microsoft and Qualcomm; telecom companies like Verizon; financials like JPMorgan Chase; and energy stocks like Exxon-Mobil.

Instead, investors should consider looking on the bright side: GE's dividend cut is actually a sign of intelligence from its management team. What it had been doing—paying out dividends just to please investors, without the cash on hand to back them up—was unsustainable. But a dividend cut, coupled with the planned realignment of GE's business model with what it does best, might just mean better profits—and higher dividends—down the road.

Contact Lara Crigger at [email protected]

 

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