Intermediate accounting II Class : Current events assignment Find a news story about a U.S. company that is changing its balance sheet in some way that should have covered in this course. For exampl

Running Head: THE CUTTING OF DIVIDENDS BY GENERAL ELECTRIC 1

The Cutting of Dividends by General Electric

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The Cutting of Dividends by General Electric

Description of The Transaction

According to an article written by Jon Chesto on 13th November 2017 in the Boston Globe website, John Flannery, the CEO of General Electric, announced that the firm would cut its dividend by half. This took place as the CEO made his presentation to investors, where he also added that the company would focus on three major industries, including the manufacture of healthcare products, the energy sector, and aviation. He also stated that the company would reduce its board of directors as well as divesting some of its businesses, such as transportation (Chesto, 2017). Additionally, the CEO stated that the company used to pay dividends that were beyond its free cash flow over that past years.

Reasons for GE Cutting Down its Dividends

Flannery acknowledged that the decision to cut down on dividends payments was not arrived at lightly. One of the reasons that he cited out for cutting dividends was that the firm was no longer in a position to offer higher payout. And that this move would be of benefit to shareholders as the money would be invested elsewhere as cutting dividends would lead to the preservation of more cash (Chesto, 2017). For instance, some money would be utilized in acquisitions; another batch would be used in buying back shares while another portion would be used to spur the growth of the company.

How Cutting Dividends Affected GE’s Balance Sheet

The cutting of the dividends led to General Electric being able to preserve more cash that was scheduled to be invested in various sectors of the company. Additionally, the move led to the strengthening of the firm’s balance sheet due to a reduction in debt levels. This is because some of the cash obtained from the decrease in dividends would be used to offset some of the firm’s debt.

Reasons as To Why Companies Cut Dividends

Many reasons make companies cut their profits. Lack of enough funds to meet dividend payment is one of the main reasons as to why firms cut dividends. This is mainly brought about by a company experiencing weak financial earnings. Ideally, dividends are derived from the profits of a firm, and much decline in dividends can make a company seek additional funds from elsewhere, including debt as well as short-term loans. Moreover, the firm can also raise its payout rate to meet previous dividend levels. Another reason that makes firms to cut dividends may be due to positive motives such as when a firm is preparing for significant acquisition as well as stock buyback. Mounting debts can also lead to business cutting dividends (McCullum, 2018). This is because debts interfere with a firm’s capacity to engage in meaningful activities such as investments as the cash available is used in paying debts. Under certain conditions such as investment opportunities presented by weathering of a major recession, a firm can also cut its dividends.

The alteration of the capital allocation policy can lead to the reduction of a firm’s dividends (McCullum, 2018). Sometimes, companies reduce their dividend as they want to as opposed to them being forced to do so by circumstances. For instance, a firm may find it wise to invest money in other areas, such as capital expenditures. However, such moves are unpredictable, and therefore shareholders require to be provided with specific guidance outlining allocation decisions. Thus, many companies around the globe cut dividends as a result of both positive and negative reasons.

References

Chesto, J. (2017). General Electric plans job cuts, slash in quarterly dividend. Boston Globe, 24. Retrieved from https://www.bostonglobe.com/business/2017/11/13/general-electric-plans-slice-quarterly-dividend-half/AZqYqgb6iL7sZ64VvBPmFO/story.html

McCullum, N. (2018). 3 Reasons Why Companies Cut Their Dividends (With Examples). Sure Dividend, 14. Retrieved from https://www.suredividend.com/dividend-cut/