General Electric (GE) was pummeled after reporting disappointing Q3 2017 earnings. New CEO John Flannery promised to right the ship, yet problems continue to materialize. The latest issue - a potential pension shortfall of over $30 billion - could be the final straw:

Not only does GE have the largest pension deficit among S&P 500 companies, that deficit is $11 billion worse than the next closest company, according to Dow Jones S&P Indices. (The $31 billion figure is from the end of 2016. Fresher numbers haven't been released.)

GE's pension nightmare is the result of years of inattention, and of historically low interest rates that have driven up pension liabilities around the world.

GE has over 600,000 current and former employees who rely on pension benefits. The following chart illustrates how it had a pension surplus of over $15 billion as far back as 2007. It had a shortfall of $6.8 billion in 2008, which grew to $31 billion at the end of 2016.

Instead of addressing the pension shortfall that materialized in 2008 former CEO Jeffrey Immelt led the company on an acquisition spree that failed to offset GE's de-emphasis on financial services. The company spent over $10 billion to string together a hodgepodge of oil & gas assets. It recently merged GE Oil & Gas with Baker Hughes to form Baker Hughes, A GE Company (BHGE); GE maintains a majority stake in BHGE.

GE's $10 billion acquisition of Alstom's Power division is now considered a failure. Management was caught unaware by a shift in demand for heavy-duty gas turbines from 46 gigawatts to 40 gigawatts. Power Systems is now being disrupted by renewable energy and GE recently announced layoffs of 12,000 in order to rightsize the business. The major question is, "Can GE make up the shortfall with assets on hand?"

GE's Liquidity Could Appears To Be Waning

At Q3 GE had cash and equivalents of about $40 billion; $27 billion was held at GE Capital and $13 billion at GE. Though its liquidity exceeds its pension shortfall the company's cash flow appears to be waning. In Q3 2017 GE generated cash flows from operations of $465 million. That pales in comparison to the $7.6 billion it generated in the year-earlier period. The major difference is that the parent received dividends of $5.1 billion from GE Capital in Q3 2016. In the past dividend payouts exceeded GE's free cash flow. GE recently cut its dividend payout of $0.96 per share ($8.4 billion) in half. Dividends from GE Capital have been halted until management can sort out appropriate reserving levels at GE Capital's long-term care business.

Last week GE announced an $6.4 billion after-tax charge related to its insurance operations and intimated it needed to make $15 billion in reserve contributions over the next seven years. Most of the reserve increases were related to its long-term care business, which has suffered from lower than expected investment returns, an aging population and more policyholders reaching claim status. That said, reserve additions could hamper upstream dividends from GE Capital to the parent company for years to come.

Time For An Equity Raise?

Central bankers' record low-interest rates have helped spur financial markets, yet may have created problems in other areas. Low rates have hurt the long-term investment returns for pension funds and companies offering long-term care policies. However, low rates and tax cuts have buoyed financial markets, which continue to set new highs each week. Over the past year, the S&P 500 (SPY) is up over 20%, while GE is off over 45% over that time frame.

Nonetheless, GE still has an equity market capitalization of over $140 billion. It could be prudent to raise equity to help shore up its balance sheet, fund its pension shortfall, and fund reserve requirements at its insurance operations. If equity markets ever turn down due to a lack of additional stimuli, it could take GE with it.