Trystan Casey
General Electric (GE), once a blue-chip stock market leader, has suffered a decline in its share price in recent years. The company's stock fell nearly 80% from its peak in 2000 and was removed from the Dow Jones Industrial Average after more than a century. GE's struggles can be attributed to various factors, including weak profits, debt, bad investments, the 2008 financial crisis, and the impact of the COVID-19 pandemic on its jet engine business. In 2024, GE split into three separate companies focusing on aerospace, energy, and healthcare, marking a significant shift for the 132-year-old conglomerate. Despite its challenges, GE remains a significant player in its core sectors, employing hundreds of thousands worldwide.
| Characteristics | Values |
|---|---|
| Year of decline | 2000 |
| Stock price decline | 80% |
| Reasons for decline | Bad investments, financial crisis, weak profits, mountain of debt, dividend cuts, job cuts, decline in jet engine business |
| Business sectors affected | Aerospace, energy, healthcare |
| Turnaround strategy | Focus on paying off debt by selling assets and improving cash flows |
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What You'll Learn
GE Capital's near bankruptcy in 2008 financial crisis
GE Capital, GE's most profitable business, nearly went bankrupt during the 2008 financial crisis. The company's decline accelerated during the Great Recession, as the financial crisis hit GE hard, with its stock dropping 42% that year. GE was overstretched and bloated, and losses by the GE Capital financial segment nearly sank the company.
GE's troubles didn't end with the financial crisis. In 2015, the company's $9.5 billion purchase of French transportation company Alstom's power business was considered a flop. GE CEO John L. Flannery commented that the company overpaid for the deal.
In 2018, GE was struggling with weak profits and a mountain of debt. Its stock had fallen nearly 80% from its highs in 2000, and it lost its spot in the Dow Jones Industrial Average after over a century in the blue-chip stock index. The company's jet engine business then suffered due to the coronavirus pandemic, as global air travel came to a halt.
However, under CEO Larry Culp, GE focused on paying off debt by selling assets and improving cash flows by streamlining operations and cutting overhead costs, which ushered in a recovery. In 2024, the company split into three separate entities, each focusing on a particular industry: aerospace, energy, and healthcare.
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Weak profits and mountain of debt
General Electric (GE) has been struggling with weak profits and a mountain of debt. Its stock had fallen nearly 80% from its highs in 2000, and it lost its spot in the Dow Jones Industrial Average after being a component of the index for over a century.
The company's debt had nearly tripled since 2013, according to calculations by Moody's. At the same time, GE's business deteriorated, leaving it with less cash to repay its debts. GE's debt-to-earnings ratio, a measure of leverage, has more than doubled over the past five years. This high level of debt left the company vulnerable to economic downturns or spikes in borrowing costs.
The company's debt and weak profits forced GE to cut its dividend in half for only the second time since the Great Depression. GE executives have been reviewing the company's portfolio of businesses and selling off assets to reduce debt and improve cash flows. For example, GE divested its stake in the oil field services company Baker Hughes and the transportation unit, which merged with Wabtec. These sales helped raise significant capital, and the share price rose 53% in 2019.
However, the COVID-19 pandemic cut short the rebound in GE's share price. The pandemic negatively impacted its lucrative jet engine business as global air travel decreased. The aviation unit, which had been GE's most profitable unit, generating 34% of GE's total revenue in 2019, was forced to lay off 10% of its US workforce in March 2020.
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$21.61 $28.03
Decline in jet engine business due to the pandemic
The decline in General Electric's (GE) jet engine business due to the COVID-19 pandemic significantly contributed to the drop in its stock price. GE's lucrative jet engine business suffered as global air travel was severely impacted by the pandemic. With billions of people staying home and international travel becoming scarce, the demand for jet fuel decreased drastically, which in turn affected the sales of jet engines.
The pandemic's effects were felt across the aviation industry, including jet engine manufacturers. According to the Worldwide Jet Engine Warranty Report, the sales decline of three "pure-play" jet engine manufacturers ranged from 21% to 32%. Boeing's civilian aircraft revenue decreased by 50%, while Airbus saw a 34% drop in sales. This decline in sales affected GE's jet engine business, which is a significant contributor to the company's revenue.
GE's jet engine business was already facing challenges before the pandemic hit. In 2018, when H. Lawrence Culp, Jr., became CEO, the company was dealing with weak profits and a substantial debt burden. The pandemic exacerbated these existing financial issues, causing a further decline in the jet engine business and putting the company's survival at risk.
The impact of the pandemic on GE's jet engine business was long-lasting. Even as the pandemic eased in 2021, the aviation industry continued to struggle with the inertia of reduced passenger counts and lower demand for air travel. This prolonged downturn in civil aviation resulted in parked and idle jets, reducing the need for new jet engines and affecting GE's sales and manufacturing operations.
The decline in the jet engine business due to the pandemic was a significant factor in GE's overall financial struggles and the drop in its stock price. The company had to focus on paying off debt, selling assets, and improving cash flows to recover from this challenging period.
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Regulatory and technological shifts threatening jet engine business
General Electric (GE) has been a leader in jet engine manufacturing since 1941 when it built the first US jet engine. The company's jet engines and other products are used in a wide variety of commercial, military, business, and general aviation aircraft. However, GE's jet engine business has faced significant regulatory and technological shifts that have threatened its dominance in the industry.
One of the main regulatory shifts impacting GE's jet engine business is the increasing focus on renewable energy and the decline in demand for fossil fuel power plants. In 2018, GE announced that it would pare its portfolio to jet engines, power plants, and renewable energy by disposing of its healthcare and Baker Hughes units. This decision was made in response to the decreasing demand for fossil fuel power plants due to the rise of cheaper solar and wind energy systems. The decline in the use of large power plants has also reduced repair revenue for GE.
Additionally, GE's jet engine business has been impacted by technological shifts in the aviation industry. The company has had to adapt to the incorporation of new technologies, such as 3D printing, which has allowed for the development of larger and more powerful jet engines. For example, GE has recently started incorporating 3D printing technologies in its engines, including the newly designed GE9X, the largest jet engine in the world. While GE has embraced these technological advancements, the company has also had to compete with new engine designs and improvements from rival manufacturers.
Furthermore, GE's jet engine business faced a significant challenge during the coronavirus pandemic, as global air travel was severely disrupted. This led to a decrease in demand for jet engines and aircraft maintenance services, impacting GE's revenue and profitability. The pandemic highlighted the vulnerability of the jet engine business to external factors and the importance of diversifying GE's portfolio.
To conclude, General Electric's jet engine business has been threatened by regulatory shifts towards renewable energy sources and technological advancements in engine design and manufacturing. These factors, coupled with the impact of the coronavirus pandemic on global air travel, have presented significant challenges for GE. However, the company has demonstrated its adaptability and resilience by embracing new technologies and streamlining its operations to remain competitive in the aviation industry.
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High dividend cuts
General Electric (GE) has had a tumultuous history, with its stock price experiencing a steep decline since its peak in 2000. One of the significant factors contributing to this downfall was the company's decision to cut high dividends.
In 2009, GE slashed its yearly dividend from $1.24 to $0.82 per share, a substantial reduction that signaled the company's financial troubles. This move was likely made to conserve cash and improve the company's balance sheet, as dividend cuts can be a way for companies to preserve capital and weather challenging economic conditions. However, this decision may have also shaken investor confidence, as dividend cuts often indicate a company's financial distress and can lead to a sell-off of the stock.
The dividend cuts by GE were followed by further decreases in subsequent years. In 2010, dividends fell even lower, and the company's struggles continued. These reductions in dividends likely played a role in the overall decline of GE's stock price and market perception. Dividends are a crucial component of investment returns, and high dividend yields can attract investors seeking regular income. By cutting dividends, GE not only reduced its attractiveness to dividend-seeking investors but also signaled a potential long-term decline in the company's ability to generate profits and sustain dividend payments.
Additionally, GE's dividend cuts may have been a result of its changing business landscape and strategic decisions. The company had been returning to its roots in manufacturing and divesting billions of dollars in loans, real estate, and various business units. These divestments and strategic shifts may have impacted the company's cash flow and profitability, leading to a reduction in dividend payouts.
While high dividend yields can be attractive to investors, they are not sustainable if a company's underlying business and cash flow cannot support them. In GE's case, the dividend cuts were indicative of broader challenges and strategic shifts within the organization. As the company grappled with weak profits, debt, and the impact of the 2008 financial crisis, cutting dividends became a necessary but detrimental step in its financial restructuring.
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Frequently asked questions
There are several reasons why General Electric's (GE) stock went down. Firstly, GE's stock fell nearly 80% from its highs in 2000, and the company lost its spot in the Dow Jones Industrial Average. The company also struggled with weak profits and a large debt burden. Additionally, GE's jet engine business was negatively impacted by the coronavirus pandemic and the resulting decline in global air travel. Furthermore, regulatory and technological shifts threatened GE's jet engine business, exposing it to declining demand and risks from alternative propulsion and stricter climate policies. Lastly, the company's decision to cut 12,000 jobs in 2017 likely contributed to the decline in its stock price.
The 2008 financial crisis nearly bankrupted GE Capital, which was previously GE's most profitable business. This crisis significantly impacted GE's stock price, contributing to the overall decline.
Yes, leadership changes at GE contributed to the volatility in its stock price. The company's board ousted two CEOs in less than two years due to the company's struggles. When Larry Culp took over as CEO in 2018, he focused on paying off debt and improving cash flows, which ushered in a recovery for the company.
GE's heavy reliance on commercial aerospace makes it vulnerable to downturns in global travel, supply disruptions, and financial and operational constraints. The coronavirus pandemic significantly impacted this business segment, causing a decline in GE's stock price.
GE has taken several steps to improve its financial performance and stock price. The company has focused on paying off debt by selling assets and improving cash flows through streamlined operations and reduced overhead costs. Additionally, GE has invested in research and development, lean operations, and U.S. manufacturing expansion to enhance product innovation and supply chain resilience.
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