- Reuters / Brendan McDermid
- General Electric announced on Monday that it’s cutting its quarterly dividend distribution in half.
- The decision comes at a time when equity investors are rewarding companies that are reinvesting in their own businesses, relative to those that pay dividends and repurchase stock.
On the surface, General Electric‘s decision to slash its quarterly dividend in half would seem to be a move that would alienate shareholders. But the opposite might actually be true.
Investors have made it known over the past two years that they prefer companies that reinvest in their own core businesses, rather than spend excess capital on dividend payments and share buybacks.
From the start of 2016 through October 2017, a Goldman Sachs-curated basket of stocks spending the most on capex and research and development beat a similarly constructed index of companies offering high dividends and buybacks by a whopping 21 percentage points, according to the firm’s data. And that outperformance has totaled 11 percentage points in 2017 alone.
That shifting preference would seem to align with GE’s decision to revamp operations and undergo a full corporate turnaround – one that will likely involve a great deal of internal investment.
And wouldn’t you know it, traders are already rewarding GE, pushing its stock higher by as much as 1.6% in pre-market trading on Monday. Any further stock gains catalyzed by the dividend decision would be welcome news to GE investors, who have already seen shares slump 35% in 2017.
While GE’s dividend cut was largely expected, it’s still notable considering the company’s status as one of the biggest dividend payers in the US, distributing roughly $8 billion to shareholders on an annual basis.
It’s also worth noting that the company might be preemptively adjusting for higher interest rates going forward. When benchmark lending rates rise, that makes the yield offered by dividend payers less attractive. At present time, some Wall Street banks expect three Federal Reserve rate hikes by the end of 2018.
- Markets Insider