GE's Dividends: Ready, Get Set, Not Yet

General Electric Co.'s (NYSE:GE) troubled industrial and financial businesses are leading to a credit-rating cut, which will likely force the conglomerate to reduce its dividend, JPMorgan said last Friday.

But until the Fairfield, Conn., company lowers its dividend, it will be near impossible for it to restructure with a possible spin-off of GE Capital, analyst Stephen Tusa said in a note to investors.

The 6-month chart, compliments of Yahoo! Finance, illustrates why the oldest, original member of the Dow Jones Industrial Average is so alarmed.

click to enlarge

Sure enough, shares of General Electric Co. jumped Monday in a big way as investors cheered the possibility that the conglomerate may eventually cut its dividend, adding billions of dollars to its balance sheet.

Tusa wrote:

These events are necessary catalysts of change for a culture that was built to manage earnings in a way that is clearly unsustainable over the long term. The bottom line is that, with deteriorating fundamentals - clearly at [GE Capital] and with industrial following - staying the course is a hurdle to capitulation.

The following content we are told, comes from a press release that the company issued Friday and was attributed to CEO Jeff Immelt:

The Board and I believe that it is in the best interests of the Company's shareowners to continue to pay an attractive dividend. The Board and I will continue to evaluate the Company's dividend level for the second half of 2009 in light of the growing uncertainty in the economy, including U.S. government actions, rising unemployment and the recent announcements by the rating agencies.

Our fundamental priorities will remain keeping the Company safe and secure in the current environment and investing in attractive growth opportunities.

Cutting the dividend might be the way to help the situation, and of course this would give the conglomerate more cash to shore up its troubled financial business and possibly preserve its coveted "AAA" rating.

Yes, but how about the fact that GE has over 1/2 of $Trillion of debt? In its most recent quarter it reported debt of $546 billion, and that is a total debt to equity ratio of 4.885. Their book value per share is reported to be around $10.09, so the current share price is closing in on the book value.

GE did declare its next regular quarterly dividend of 31 cents a share payable in April, but the above remarks do sound a bit like that commitment to paying $1.24 a share this year might not be quite as firm as it was just a couple of weeks ago.

The volume on Monday was a stunning 233 million shares, almost double the daily average. Some analysts believe that the final passage of the federal government's economic stimulus package will also cause GE to rally further.

That might be true, and a rally to recent highs of around $17 would not surprise us. Speculators might be willing to take a gamble here and ride this kind of momentum. But with the dire fiscal challenges that GE faces, we are just as likely to see GE trading back down closer to its book value before this year ends.

Dividend-paying companies hate to cut their dividends. That's why NYSE Euronext (NYSE:NYX) after reporting disappointing quarterly results, chose to maintain its current dividend payout.

If GE eventually cuts its dividend it will be done only out of sheer desperation. As many learned painfully from their investment experience with such titans as Citigroup (NYSE:C), cutting your dividend doesn't always protect your share price.

In fact it can be perceived as a harbinger of more difficulties to come, a further decline in the price of the stock and that is what GE is trying hard to avoid.

Disclosure: long NYX

Comments

[U338129:]

I would just like to know one thing, where were all these articles against GE's balance sheet before the crisis happened? Just seems like yet another article that's easy to write and is nothing more than jumping on the bandwagon of stuff that's already been said and documented.

No personal attack towards the author; but, I think we get it. GE has a ton of debt, it faces headwinds it's never faced before (supposedly), and the dividend cut would save capital.

Just seems like a lot of people writing about GE now are jumping on an easy case and they are very late to the game. Good analysis is provided before the you-know-what hits the fan. To do these articles now is equivalent to crying over spilled milk (especially when so many others have said the same thing already).

Feb 10 06:40 AM

[kevin dempsey:]

TELL ME WHATMAJOR BANK HAS A BETTER CREDIT RATING THAN GE ?

NO ONE! SOOO TELL ME IF GE HAS $ TO LEND AND COMPANIES NEED LOANS WHICH BANK CAN BEAT GE AND MAKE AS MUCH PROFIT ON THE LOAN? NO ONE ! AM I MISSING SOMETHING?

Feb 10 08:24 AM

[ex GE'er:]

It's all about credibility. And with Immelt at the helm, GE has no credibility. The market has no faith in GE any more and can't believe anything that comes out of Immelt's mouth.

Feb 10 08:43 AM

[Chefo:]

Of course GE has debt because it consolidates GE Capital's balance sheet. In fairness, however, GE Capital is levered up 7 to 1, for a Tier 1 of 15%, which is very conservative for a bank.

Unlike C, however, GE Capital holds assets to maturity, which means it is NOT forced to write them down.

Are they hurting? Sure. All banks are. Do they have potentially troublesome assets on GE Capital's balance sheet? Yeah, though they usually underwrite much more conservatively than Wall Street.

As for your thoughts on the dividend--I agree; they need to cut it. I figure after this crisis finds a bottom, you will see banks and lenders have ROEs in the 7-9% range (as opposed to 18-25% before the crisis). That is to say GE Capital should make in the neighborhood of $4-5B/year depending on how much they contract the balance sheet. The industrial side is rock solid and makes another $12-$13B of free cash flow. Add them together, and you have cash flow generating ability in the $16-$18B range. Less than the $22B they did in 2008, true, but not a disaster. Assuming a payout of 50%, the dividend should really be about $8-$9B, which would imply a ~30% cut from the current level. That still leaves GE with a yield of 7-8%. Sounds good to me...

Best,
Stefan

Feb 10 09:04 AM

[GimliJan:]

I am new investor who bought GE after using it as a lesson in how to research companies I want to invest in long term.
I appreciate all of the excellent analysis by the members on these articles. I have learned that I have much to learn! ;)
All of you have made good points for and against GE (and Jeffrey!@#$!)
I would like to know how to purchase preferred shares of GE or any other top rated company. I would invest in some of their bonds but I am starting small with $100 a month additions to my Roth IRA trading account, and don't have enough to put $1000 in the Bonds.
Thanks

Feb 10 10:40 AM

[cgm205:]

I have commented elsewhere about GE's debt and was told it "couldn't be considered as ordinary debt, but debt such as banks have which is depositor money" or words to that effect.
Anyone have a good explanation and/or breakdown of GE debt?
Thanks

Feb 10 12:55 PM

[auto44:]

You are missing the half trillion dollar debt and insufficient positve cash flow to continue paying the same diividend. The stimulus package the politicians are now arguing over is not much more than the GE debt.


On Feb 10 08:24 AM kevin dempsey wrote:

> TELL ME WHATMAJOR BANK HAS A BETTER CREDIT RATING THAN GE ?
>
> NO ONE! SOOO TELL ME IF GE HAS $ TO LEND AND COMPANIES NEED LOANS
> WHICH BANK CAN BEAT GE AND MAKE AS MUCH PROFIT ON THE LOAN? NO ONE
> ! AM I MISSING SOMETHING?

Feb 10 01:34 PM

[U338129:]

Make that 6:1:)

Feb 10 02:17 PM