Why GE's bad news, may actually be good news in the long run

General Electric (NYSE:GE) shares are taking another beating today after analysts at Morgan Stanley (NYSE:MS) and UBS (NYSE:UBS) weighed-in on the problems plaguing the industrial giant, many of which were confirmed in last week’s earnings report, including the company’s cash flow and the potential of a dividend cut.

However, these two firms also say the short-term pain may pave the way to a better managed company down the road.

Following the latest quarterly results, Morgan Stanley downgraded GE to underweight from equal weight, citing a higher probability of a dividend reduction. The bank also reduced its share price target on GE to $22 from $25. Morgan Stanley noted that GE’s stock price will suffer in the short term if the dividend is reduced, but also noted that trimming the dividend might be the right course of action and would “help the company achieve better cash flow in 2018.”

UBS also issued a post-earnings downgrade on GE, to neutral from buy, and reduced its price target to $24 from $31 and added that “a lot of negative sentiment is now reflected in the shares.” Thestock has lost over 24% this year.

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GE’s newly-minted CEO John Flannery said on the earnings call that the dividend would be a “priority” in the company’s ongoing capital allocation planning, but also noted that the company needs to balance investing free cash flow in growth with paying dividends. According to conversation between the analyst community and Flannery on GE’s call, as well as a note from Morgan Stanley last September, the current dividend payouts use up approximately 100% of GE’s free cash flow.

The company will release the results of its capital allocation planning, including the future dividend payouts, during the company’s investor day on Nov. 13.