You probably heard the news that General Electric is cutting dividends for the second time in a decade. The previous time when General Electric cut distributions was in 2009, during the financial crisis.
The dividend cut was not surprising, given the fact that the conglomerate had a high payout ratio amidst a stagnant trend in earnings per share.
For example, the company earned 99 cents/share in 2009, the first year after the financial crisis. By 2016, GE earned $1/share. At the same time, dividends per share grew from 61 cents/share to 93 cents/share. The company is expected to earn $1.07/share for 2017 and has paid 96 cents/share in dividends. The payout ratio was obviously too high, and unsustainable.
When you cannot grow earnings, and have a high payout ratio, you cannot pay dividends.
A lot of commentators saw the dividend cut as evidence against dividends however.
This doesn’t make any sense.
GE’s story is actually a cautionary tale against share buybacks.