General Electric Company’s (GE) split-adjusted shares began trading in August 2021. One month before that, GE effected a 1-for-8 reverse stock split. This stock split increased GE’s number of outstanding shares available, which consequently affected the share price.
GE’s after earnings on October 14, 2021 were $102.74 per share. The stock opened at $103.14 and closed at $102.74. With a volume of 6,140,944, GE’s market activity had a high of $103.65 and a low of $102.37.
Was GE’s Reverse Stock Split a Bad Idea?
On June 18, 2021, GE announced a 1-for-8 reverse stock split, proportionately reducing the number of shares of its Common Stock. The common stock was valued at $0.06 per share issued under the certificate of incorporation and subsequently reduced in par value to $0.01 per share.
Shareholders had previously approved the reverse stock split at the annual shareholders’ meeting on May 4, 2021.
Reverse stock splits are commonly used by small-cap companies to reach exchange listing requirements and make them more affordable to individual investors. GE’s 1-for-8 reverse stock split caused a media frenzy because this tactic was unusual for such a large corporation. This new strategy may have been part of new CEO Larry Culp’s leadership model.
Why Did GE Do the Reverse Stock Split?
First, what is a reverse stock split? A company does a reverse stock split to exchange a fixed number of existing shares for a smaller number of new shares. Initially, the new shares have a higher price, but there are fewer shares to offer for sale.
Recently, GE divested several of its businesses, including Oil and Gas, NBC Universal and GE Capital Aviation Services, or GECAS. Shares were not proportionally reduced during these divestitures, leaving the company with nearly 8.8 billion outstanding shares — much higher than its competitors in the industry.
How Will the Reverse Stock Split Affect Future Earnings?
Following the reverse stock split, there will be fewer shares of common stock outstanding. This will increase the per-share net earnings or loss and per share amounts of common stock. The retroactive effect to the reverse stock split will be adjusted in financial statements issued after the reverse stock split is effective. Since the August 1-for-8 reverse stock split, GE’s stock has risen 5.4%.
Market Analysts’ Reactions to the 1-for-8 Reverse Stock Split
Market data research experts, FactSet, surveyed a group of 20 financial analysts including Stephen Tusa of J.P. Morgan and Jeffrey Sprague of Vertical Research Partners. The survey revealed that nearly all of the analysts raised their GE split-adjusted price targets to just below current levels.
Tusa claims that despite GE stock’s high expectations, it has limited intrinsic value. GE shares managed to avoid a broader-market selloff this week despite Tusa’s raising his price target by 38%.
Further Impact of the Reverse Stock Split
GE spent over $350 million per year to support its dividend even at the low price of $0.01 per share per quarter. Although cash flows have recently improved, dividend payouts are still only about 10% of GE’s operating cash flow. Reducing the share count to 8, GE’s management has the flexibility to reduce dividends by the same amount and maintain $0.01 each quarter.
How Will Investors React to the Reverse Stock Split?
Institutional investors are more inclined to follow minimum market cap, sectors, liquidity and governance. GE stock would likely be included in index funds tracking the S&P 500 whether trading was at $1 per share or $100 per share. Some funds even target low-priced stocks.
Conversely, retail investors might change their behavior regarding GE because some have been taught to believe that share price is important. Since individual investors typically have less money to invest than their institutional counterparts, purchasing large share amounts might be more difficult.
Overall, the impact of GE’s reverse stock split varies by investor and their beliefs, but reduced volatility may have the greatest impact because of more expensive lots.
GE Stock Market Performance Snapshot
Over the last several days, GE’s stock rose slightly 0.2% in midday trading. The stock then climbed 5.4% after the 1-for-8 reverse stock split occurred. See the Google Finance market snapshot below.
A well-respected voice in the financial industry, Tusa of J.P. Morgan further confirms his neutrality concerning GE. He warns his clients that GE doesn’t screen well on any measurable factor for given high expectations regarding an increase in earnings before interest, taxes, depreciation and amortization — EBITDA — in the third quarter.
Should You Buy, Sell or Hold Your GE Stock?
Not long ago, GE was in enormous debt, and bankruptcy rumors spread across the industry. Previous short-tenured CEO John Flannery opted not to reduce the quarterly dividend to $0.01. Looking back, some think that a reverse stock split could have saved the conglomerate millions of dollars back then.
Fast forward to 2021, GE is managing its debt and has a positive cash flow, largely due to the reverse stock split.
According to GE, the reverse stock split was a major player in the company’s transformation, yielding a stronger balance sheet, an offensive market shift and significant improvement in orders. The reverse stock split could very well be GE’s market turning point, but probably won’t be the cause of it.
Current and Future Outlook
Today, GE stock is at the upper level of a wide, horizontal trend. Normally this is a good opportunity to sell. However, a breakthrough at the top trend line at $106.93 is a strong signal to buy, resulting in a trend shift.
With this current horizontal trend, you can expect a 90% probability that GE stock will be traded between $97.22 and $107.62 at the end of the quarter.
Typically, a break in this horizontal trend is followed by a large volume increase. Stocks don’t usually ascend directly from the bottom of a trend to the top. Potential top runners are stocks that fall in the middle of a horizontal trend.
Stocks should be in a particular buying range. Look for stocks of a company with strong fundamentals when buying. The buy point for GE stock is $105.51. However, the shares are well below the entry and the relative strength, or RS, line is uninspiring.
Currently, GE is trading higher than its 2019 levels. Looking at the company’s revenue, however, suggests that shares should be priced lower than 2019 prices. See the chart below to compare GE’s major businesses.
The third-quarter FactSet EBITDA consensus is for $1.84 billion — an increase from $1.01 billion last year. This would mark the highest total since the fourth quarter of 2019.
Since new CEO Larry Culp took command at GE, profit margins and orders have improved, creating a foundation upon which the company can build far into the future.
Expect to see GE’s third-quarter after October 14 earnings results before the opening bell on October 26. After GE’s second-quarter report, the company is expected to achieve leverage of less than 2.5% over the next three years. Analysts predict that if GE doesn’t reach its high expectations, deleveraging fails and risks are raised.
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