What's going on?
Shares of beleaguered US industrial giant General Electric (GE) fell almost 5% on Tuesday after an influential Wall Street firm sharply lowered its forecast for the company’s share price.
What does this mean?
J.P. Morgan research analyst Stephen Tusa has been more negative on GE than most of his peers for years – and, so far, he’s been proved correct. So investors took notice when he once again cut his outlook for GE’s shares on Tuesday, citing the company’s low cash generation. In other words, after all the accounting mumbo-jumbo that’s typical of such a large conglomerate, GE doesn’t actually produce that much cold, hard cash – which makes it difficult to continue to pay both a dividend to its shareholders and interest on its debt.
Why should I care?
For markets: Investors are struggling to see light at the end of the tunnel.
GE’s new CEO took over last summer and has since said he wants the company to focus on three main areas: healthcare, power and aviation. The plan is to gradually sell off most of the other businesses – but GE may not get the price it thinks they’re worth. Another issue is that unforeseen legacy costs from the past keep popping up, including a $6 billion charge from an old insurance business. Added to all these concerns is GE’s rather large debt pile, which increases the risk of owning GE shares since those lenders would likely leave nothing for investors in the event of GE going down the pan.
For you personally: Diversification is an important investing principle.
For decades, General Electric was a steadfast investment: as one of America’s biggest and most influential companies, it could be counted on to pay a healthy dividend each year to its investors while increasing in value as well. But even a giant can fall, which should be a reminder that every individual stock is risky. Owning a bunch of different stocks is usually a safer – and ultimately more profitable – way to invest.