Last week, General Electric Co. (GE) announced that it would be freezing pension benefits for 20,000 employees. This prompted us to check in on one of the investing themes that we looked at last year which featured GE as the prime example, that of a yield trap. It is difficult to catch a falling knife, and investing in a company in distress is no less difficult. When will the shoes stop dropping? If we spot a company that has a relatively high dividend yield it is more often than not due to a fall in the company’s share price. When prices continue to fall and dividends get anomalous this is often a sign that a company is in distress. That company will need a turnaround, and turnarounds are usually difficult and take longer than forecast. The question becomes at what point do you invest in the turnaround.
Note that we made these comments more than one year ago after GE had already cut their dividend once. They have now all but eliminated their dividend as seen in the chart below. The company’s stock has fallen –33% since our newsletter on 8/6/2018. We say this not to beat our chest, but to remind our clients of the difficulty in spotting the exact point where a company (or an entire market) will bottom. Be wary of those who say that they can spot a market bottom. This author has watched companies and individuals be pulled in by Svengali types in the past, only for their predictions to come up as empty as any rational person would expect. Be careful, diversify, and if somebody says you can’t lose… run away fast.