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GE stock options point to big move after earnings, dividend cut
MARKETWATCH 3:41 PM ET 10/19/2017
Symbol Last Price Change
GE 23.58down +0.46 (+1.99%)
QUOTES AS OF 04:00:11 PM ET 10/19/2017
'Straddle' pricing in a 3.6% one-day, post-earnings move in GE's stock, which would be the biggest in over four years.

General Electric Co.'s (GE) investors should expect to be surprised when the industrial conglomerate reports results Friday, as the options market is pricing in the biggest one-day post-earnings move in over four years.

But for those worried that GE may cut its dividend, at least they won't be shocked.

GE (GE)is scheduled to report results before Friday's opening bell. The company usually beats earnings expectations, but its stock has fallen on the day the last six quarterly reports were released.

Don't miss: GE earnings: Can CEO Flannery's first report break a string of disappointing results (http:// www.marketwatch.com/story/ge-earnings-can-ceo-flannerys-first-report-break-a-string-of-disappointing-results-2017-10- 16)?

An options strategy known as a "straddle," which involves the simultaneous buying of bullish and bearish stock options at current prices, implies a 3.6% move in GE's stock, in either direction, on Friday. Read more about option straddles (http://www.marketwatch.com/story/wall-street-is-underestimating-just-how-volatile-3rd-quarter-earnings-season-could-be- 2017-10-11).

While that might not seem like such a big move, the stock hasn't moved that much on the day earnings were reported since they rose 4.6% on July 19, 2013, after Q2 2013 results.

And over the past 20 quarters, the average one-day post-earnings move is 2.1%, while the median is 2.25%. The average of the 12 declining days is 1.8% while the average of the up days is 2.6%.

GE's stock has been struggling, as it closed at a two-year low as recently as Friday, amid concerns over what recent changes in key management positions (http://www.marketwatch.com/story/ges-stock-falls-to-2-year-low-as-leadership- changes-fuel-investor-fears-2017-10-09) might mean for results, and on worries that a tightening cash position (http:// www.marketwatch.com/story/ges-stock-tumbles-to-2-year-low-after-jp-morgan-gets-more-bearish-2017-09-07) would force the company to cut its dividend.

The stock has tumbled 25% year to date through Thursday afternoon, while the SPDR Industrial Select Sector exchange- traded fund (XLI)has gained 16% and the Dow Jones Industrial Average has climbed 17%.

Based on current stock prices and GE's current dividend rate, GE's dividend yield is 4.06%, compared with the implied yield of the industrial ETF of 1.83% and of the Dow Jones Industrial Average of 2.22%.

According to derivatives analyst Christopher Jacobsen, the options market has already started pricing in the dividend cut.

GE currently pays a quarterly dividend of 24 cents a share. Jacobsen said looking at options that expire on January 2019, which should include the payment of the next five quarterly dividends, one can assume a payout of a total of $1.20 a share if the dividend policy remained unchanged.

But using a formula that calculates the theoretical future value of the stock at January 2019 expiration, using the current stock price and interest expenses, minus dividends, implies a rather large dividend cut.

"After comparing the theoretical future stock price to the market-implied one, it appears as if the options are already pricing in the potential for dividend cuts and are currently implying around [71 cents] of cumulative dividends between now and January of 2019, below the [about] $1.20 we would expect in the absence of any action," Jacobsen wrote in a note to clients sent out early Thursday.

A 71-cent payout over five quarters would imply a quarterly dividend of 14.2 cents a share, or 41% the current dividend.

GE's stock surged 2.4% in afternoon trade Thursday ahead of results. At current stock prices and at the options implied dividend rate, the dividend yield would be 2.40%, which is more in line with the implied yield of its peers and the Dow.

-Tomi Kilgore; 415-439-6400; [e-mail]


(END) Dow Jones Newswires
10-19-171541ET
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