Dividend or AAA Debt Rating: Which Will GE Choose?

Is General Electric (GE) the next major company to cut its dividend after holding it flat for a period of time? Last year, in a public statement, GE CEO Jeff Immelt said that GE would hold its dividend flat through 2009. Recently, there has been mounting pressure on the company that may make that promise difficult to keep.

Last month, Standard & Poor’s (S&P) lowered its outlook on General Electric’s debt ratings to “negative.” S&P said there was at least a one-in-three chance it would cut GE’s grade from triple-A within the next two years. A rating cut would raise the company’s borrowing costs, diminishing a key advantage GE Capital has had over its competitors.

In a further tightening of the noose, Sterne Agee analyst Nick Heymann said the company likely faces a serious decision - sustain the dividend or the AAA rating. Heymann thought a rating change would not come until the first or second-quarter financial results are released in April and July, respectively.

Only a precious few companies still carry the AAA debt rating. They include Berkshire Hathaway Inc. (BRK.A), Exxon Mobil Corp (XOM), Johnson & Johnson (JNJ) and Pfizer Inc. (PFE).

For those of us who include dividends from GE stock in our retirement plan, we may want to reexamine our retirement vision.

Disclosure: Long GE, JNJ and PFE.

Comments

[malach hamo...:]

The precipitous drop in GE shares is proof that the belief in its dividend has already been eroded.

Jan 12 05:23 AM

[UTC LOVER C...:]

I just don't understand why people like GE so much. I'm glad i don't own any GE stock. United Tech. has been more consistant than GE. It has less debt. So my question is why doesn't United Tech. have a better credit rating than it does? Am I missing something?

Jan 12 10:18 AM

[Chief Of Staff:]

Cranky Investor has it right, the market has factored in the fundamentals on GE, highly levered, exposed through GE Capital, circle back on dividend almost certain. Immelt can't run away from AAA now. Apreciate GE does not have a long term strategy, only goal their managers have is to meet next quarter NI targets.. regardless of the cost.

Jan 12 01:09 PM

[joesavage:]

UTC LOVER CHRIS , GE will do just fine, it's doing much better than most companies in one of the worst downturns and that says a lot about GE. The reason you don't understand why people like GE say's a lot about you, people that like to bad mouth a company they know nothing about.
Yes, you are missing something.

Jan 12 10:30 PM

[Robert Wein...:]

I guess your name says why you own GE. Lets take for granted that your right about GE and say that they cut it in half.

Lets for good measure say that GE profit drops in half as well.

What is your net result after?

You have a AAA rated stock that has been really beaten down that has a PE of about 13 and a dividend of 4.5%

In my book you still have a great investment. Still worried that things could get worse and want to protect yourself? No problem, write some LEAPS or longer term options to help protect against some downside. (sorry, no such thing as risk free money unless you want to bring it down to the bank)

I for one have been selling puts in GE as I think the price is depressed due to fear which I think will go away.

What is more strange is that someone like me is a net long via options as I short over 95% of my trades and GE is the only stock I am long with. There just simply is way too much fear in this stock for me not to want to buy it as the current facts and even the unknown of the earnings report say that if it does go lower it will have a very good chance to go back up quickly in my opinion.

Jan 17 06:03 PM