General Electric Co.’s first dividend cut since 1938, while unlikely to prevent the loss of its top-level AAA ratings, may provide enough cash to mitigate a potential cut by ratings services.
The reduction in the quarterly payout to 10 cents a share from 31 cents in this year’s second half will free up abut $9 billion more in cash flow a year, the Fairfield, Connecticut- based company said yesterday. That money can be put to other uses, such as bolstering the GE Capital finance arm as a deteriorating economy increases the risk of credit losses on consumer loans and declining real estate values.
“We think the rating agencies should at least look favorably upon GE’s more conservative cash profile,” John Inch, a Merrill Lynch & Co. analyst in New York who rates the stock “neutral,” wrote to investors on Saturday. “The more manageable dividend payout lowers the probability that GE’s debt rating could prospectively be cut more than two notches.”
GE’s debt ratings could be reduced as many as three levels without triggering covenants that force a shift of resources to bolster the finance unit. Staying within the range known as AA by both Moody’s Investors Service and Standard & Poor’s Corp. would also allow Chief Executive Officer Jeffrey Immelt to make good on his promise that GE can function normally with less than a AAA rating. A downgrade nonetheless may increase borrowing costs and further hurt profit at GE Capital.
Moody’s said on saturday it will keep GE on review for a possible debt downgrade from Aaa, as it calls the highest level. Standard & Poor’s also kept GE’s top-notch AAA and “negative” outlook unchanged and said “it would be difficult” for GE to achieve its $5 billion profit forecast for the finance unit in 2009 as conditions worsen.
‘A Lot of Questions’: “It sounds like they still have a lot of questions to ask the company,” Matthew Eagan, portfolio manager in Boston at Loomis Sayles & Co., which oversees about $95 billion in fixed- income assets, said in an interview. “In normal markets I would say it’d probably be enough. But it’s a tough call. In this market it matters how much losses are.”
GE Capital’s divisions include private-label credit cards, real estate, aircraft leasing, bankruptcy financing, and mid- sized company lending, making it a competitor to most banks. The segment’s profit dropped 30 per cent to $8.6 billion last year, as real estate profit dropped by half and the GE Money consumer division declined by 14 per cent.
