Can GE Keep Its Promise Not to Cut Its Dividend?

Dec.10.08 | About: General Electric (GE)

Last week General Electric (NYSE:GE) reiterated for the second time that it will continue paying out a quarterly dividend of $0.31/share in 2009. GE is going thought a difficult transition, as it is trying to deleverage and decrease the profit contribution of its GE Capital unit from 50% to 40%. Furthermore the company is also trying to maintain its triple A rating and to keep its dividend safe.

With GE’s earnings expected to be around $0.50 in 4Q 2008, the earnings per share for 2008 in total comes out to $1.88-$1.90. If the dividend is maintained at $1.24, then the payout ratio will climb to its highest levels since 2005. The deleveraging factor of 6, is a result of the company lowering outstanding commercial paper balance to $50 billion from $75billion. Furthermore GE now plans to issue about $45 billion in long-term debt next year, which is less than the $66 billion it has maturing. The company received $3billion in funding from Warren Buffett and $12.2 billion from sales of common stock.

Due to the decrease in leverage it seems that the new GE that will emerge after the financial crisis is over will be different. I doubt that the new GE will be able to grow its earnings in the double digits, assuming that its leverage is lower, which allows for less flexibility to fund projects that make profit for shareholders. Furthermore given the fact that the dividend costs about $13 billion annually, I see an increased chance of a dividend cut. Just because the company reaffirms that it won’t cut its dividends, doesn’t really mean that it won’t do it two months later. Citigroup (NYSE:C) and Bank of America (NYSE:BAC) were two noticeable companies, whose CEO’s claimed that their dividends were safe, only to reduce them several months after those statements.

If GE doesn’t cut its dividends, holding shares of the company without adding any new funds to the position would be a good move. If General Electric does cut its dividends however, the wise decision would be to allocate your funds in other opportunities.

Disclosure: Author is long GE.