GE: Lose AAA Rating or Cut Dividend

The past two weeks have been pretty uneventful in terms of dividend increases, mainly due to the Christmas and New Year’s holidays. Once the majority of market participants returned to their trading desks, it was again business as usual. The markets did end the week 4.20% lower, which left the largest ETF by assets that tracks S&P 500, the SPY, down 1.2% on the year. The increase in unemployment to 16 year highs didn’t help either.

The negative tone for the week was set on Monday when a Sterne Agee analyst Nick Heymann speculated that General Electric (GE) likely faces a serious decision - sustain the dividend or the AAA rating. General Electric has confirmed on a number of occasions that it’s dividend of $1.24/share is safe throughout 2009. Despite the reassurance from GE however, there still is an increased chance that GE dividends might not be safe. Check out my analysis of GE from this link.

There were several other companies that announced increases in their payments to shareholders last week.

Genesis Energy, L.P. (GEL), which engages in the pipeline transportation of crude oil, natural gas, and carbon dioxide (Co2); gathering and marketing of crude oil; wholesale marketing of Co2; and processing of syngas, announced that its Board has approved an increase in its quarterly dividend from $0.3225 to $0.33 per unit. Genesis Energy, L.P. has consistently increased its dividends since 2003. The stock currently yields 11.90%.

Robbins & Myers, Inc. (RBN), which is a supplier of systems for critical applications in global energy, industrial, chemical and pharmaceutical markets , announced that its Board has approved an 11% increase in its quarterly dividend from $0.0375 to $0.04 per common share. Robbins & Myers, Inc. has consistently increased its dividends since 2006. The stock currently yields 0.80%.

Pentair, Inc. (PNR), announced that its Board has approved a 6% increase in its quarterly dividend from $0.17 to $0.18 per common share. Pentair, Inc. is a dividend achiever which has consistently increased its dividends for almost two decades. The stock currently yields 2.70%.

American Financial Group, Inc. (AFG), announced that its Board has approved a 4% increase in its quarterly dividend to $0.13 per common share. American Financial Group, Inc. Inc. is a dividend achiever which has consistently increased its dividends since 2005. The stock currently yields 2.30%.

Of the stocks below Pentair shows some promise for my dividend growth strategy. PNR could be an interesting dividend play on dips below $24. I like the fact that the company has managed to double its dividends almost every seven years on average.

Disclosure: Author is long GE.

Comments

[Diegojames:]

Bought and SOLD GE when it went errratic and the MKT DUMPED. TOO MUCH FINANCIAL EXPOSURE, TO MUCH MEDIA ETC.
LOOK AT NBC AND ITS BLOATED SALARIES. IMMELT and
JACK WELCH SHARE BLAME-OVER INDULGENCEfrom MEDIA.

GMA(Good AM USA), WALLSTREET, CONGRESS,GM, CITICORP ETC
no more GOD STATUS..i Banks, Rubin , Summers, Greenspan,welch,immelt all need a flushing by AMERICA , along with the MEDIA that maintained THEM and CONGRESSIONAL MISMANAGERS.

NEED TO SPIN OFF DIVISIONS NOW....BUT I DO NOT BET ANYMORE.
HOW WOULD GE BONDS BE RATED---JUST TO COMPLICATED FOR A SUNNY MORNING IN SUNNY CALIFORNIA
LONG HE,AA,COP,CAT,
MORE LATER NEED TO REMOVE THE LEEK TART AND START THE SALMON.
DIEGOJAMES
PORTER RANCH, CALIFORNIA

Jan 11 01:27 PM

[M dub:]

question: why need to reduce the dividend when you have a backstop guarantee on refinancing / issuing debt? taxpayers have guaranteed GE's divivend ; at one time there could have very well been a run on the bank, but now hundreds of billions in its cap structure is backed by fdic (bonds) or fed (CP). Financial flexibility by taxpayers means GE dividend needs to go nowhere.

As a taxpayer, this is ludicrous, but as an investor what could be better than to have your guarantor be big daddy?

Jan 11 03:47 PM

[Urbane Gori...:]

mdub..Aside from the excessive use of CAPS, I agree with Diegojames... (Also agree with the leek pie and salmon)... GE has too many divisions that are subject to teh whims of our present economic collapse. And the financial guarantee only really applies to GMAC, just part of GE. What's the near-term upside for GE? The poor quality appliance division? Aerospace? Not the reconstituted finance division! That really only leaves the industrials. And maybe in a year that might start to work if our new President can actually get the infrastructure play moving, or if China gets back in gear.... Remember that these **big** projects have a lot of hurdles, EPA, lawsuits, contracts, engineering etc... and they don;t turn on a dime. Having said that, GE does seem to have activity in China now that might ramp up. The question there is, why buy GE and drag around everything else, when you can buy ABB or SI which are already working well and don't have the rest of the business to drag along.

jegan ;-)

Jan 11 05:00 PM

[herbert hoover:]

If GE cuts that dividend before 2010 Immelt is toast.

Jan 11 06:20 PM

[prudentinve...:]

You make many good points. I own all three GE, Alstom (former ABB), and SI, and have added to all when the market tanked in November. I am looking to add more, but at the right value.

GE in the teens is cheap, despite the ugly baggage in broadcasting & finance. I would not bank on continued and unending taxpayer support for the dividend and AAA rating, as the political winds are fickle. Alstom (AOMFF) also has precarious French govt. support, which may change with the whims of the EU competition regulators, and additionally their technology is much weaker than GE's. SI is a great company, but stock is pretty expensive in the $70's. I added to it @ $45 some weeks ago, and feel that at $40-$48 it makes good sense.

Note too that neither SI or AOMFF make aircraft engines, and this gives GE a big edge when global economy rebounds, as well as access to military contracts. For the long term (>5 trs), I think GE is likely to outperform the others if you buy it in the mid-teens, that is unless SI returns to the 40's.



On Jan 11 05:00 PM jegan ;-) wrote:

> mdub..Aside from the excessive use of CAPS, I agree with Diegojames...
> (Also agree with the leek pie and salmon)... GE has too many divisions
> that are subject to teh whims of our present economic collapse. And
> the financial guarantee only really applies to GMAC, just part of
> GE. What's the near-term upside for GE? The poor quality appliance
> division? Aerospace? Not the reconstituted finance division! That
> really only leaves the industrials. And maybe in a year that might
> start to work if our new President can actually get the infrastructure
> play moving, or if China gets back in gear.... Remember that these
> **big** projects have a lot of hurdles, EPA, lawsuits, contracts,
> engineering etc... and they don;t turn on a dime. Having said that,
> GE does seem to have activity in China now that might ramp up. The
> question there is, why buy GE and drag around everything else, when
> you can buy ABB or SI which are already working well and don't have
> the rest of the business to drag along.
>
> jegan ;-)

Jan 12 08:48 AM

[Chris B:]

GE's competitive advantage is that it is so big that it can attract low-cost AAA capital and finance its customers at rates lower than any smaller competitor could match. That is the foundation of the company's success.

If shareholders force management to sell this competitive advantage just to maintain a 7% dividend in one particular year, then this value-destroying decision and the subsequent decline of GE will be studied in business textbooks for years.

Jan 12 10:47 AM

[M dub:]

jegan,
i see what you are saying but i was trying to address the op's question of dividend and credit quality, not earnings downside. hopefully no one really sees GE as anything other than a bank in terms of the risk on investment, for if not then they own the common equity of an industrial with 13.5x debt/ebitda (yikes!) but as i said with a government backstop on the bank all is well and investors can put their head in the sand for a while.

i agree that the spin coming out of there is of epic proportions given the severity of conditions, not just economically but also at GE. They point to 70% of earnings coming from service revenue, and that's all nice, but what of all that (seemingly) ginormous operating leverage (ie high fixed overhead) as orders / backlog go down with cancelled orders? No, the gov't is not (yet) backstopping GE industrial, but who's to say they don't sell a few extra bonds at GMAC and upstream some cash dividends to parent?

Even that's not a stretch to consider, as even management decided to keep at the parent level buffet's $3b of preferred equity, rather than funnel it down to gmac when it needed it the most.

they want a stable rich dividend and AAA rating, and with government gty'ing the bank, why not? Its all possible, unless of course the sovereign credit rating goes down.......




On Jan 11 05:00 PM jegan ;-) wrote:

> mdub..Aside from the excessive use of CAPS, I agree with Diegojames...
> (Also agree with the leek pie and salmon)... GE has too many divisions
> that are subject to teh whims of our present economic collapse. And
> the financial guarantee only really applies to GMAC, just part of
> GE. What's the near-term upside for GE? The poor quality appliance
> division? Aerospace? Not the reconstituted finance division! That
> really only leaves the industrials. And maybe in a year that might
> start to work if our new President can actually get the infrastructure
> play moving, or if China gets back in gear.... Remember that these
> **big** projects have a lot of hurdles, EPA, lawsuits, contracts,
> engineering etc... and they don;t turn on a dime. Having said that,
> GE does seem to have activity in China now that might ramp up. The
> question there is, why buy GE and drag around everything else, when
> you can buy ABB or SI which are already working well and don't have
> the rest of the business to drag along.
>
> jegan ;-)

Jan 12 10:58 AM

[Stockguy456:]

Best thing for GE is for Immelt to step down!!!!

Jan 12 11:02 AM

[Gold Barron:]

GE will lower or eliminate dividend.

Jan 12 05:44 PM

[ozcutty2:]

Paying out a fat dividend whilst borrowing money at 10%, makes perfect sense.......

Jan 12 05:58 PM

[User 265729:]

What will the talking heads at NBC, CNBC and MSNBC do?

After all, I'm sure they get a lot of their income via GE stocks. No wonder Matt Lauer looks so glum.

Jan 12 08:26 PM

[drone:]

This crap company could slice itself up in any number of ways and be more profitable for shareholders. But that's no help to Jeff Immelt who likies his 10 million a year, his corporate jet and whatever else.

Jan 12 09:17 PM

[MarketAnalyst:]

Not only outside investors are disappointed with Immelt’s performance for the last 8 years. Many employees, especially division executives who are holding worthless stock options, often complain that had Immelt worked in any other company with this kind of stock performance, he would have been fired long time ago. It seems the problem is at the GE board. Any resemblance to the Enron board who refused to act until the last minute?

GE is definitely worth more if carved up to individual companies. Forget about the synergies that Immelt always talks about. It's the ego to be the CEO of the biggest company. Now GE Capital can no longer provide the last minute earnings manipulation, GE finally gave up the quarterly guidance. Some of the GE Capital divisions, like real estate and energy investment divisions, have operated exactly like hedge funds only with cheaper money maybe less leverage. Now the borrowing costs have gone up (the market doesn’t recognize GE’s AAA), their biggest advantage is gone. It will not be a surprise if GE loses its AAA by this summer. GE board should take a serious look at Immelt’s performance.

Jan 13 07:27 AM