By Rachel Layne
Dec. 2 (Bloomberg) -- General Electric Co. said fourth- quarter profit will be at the low end of the previous forecast and that steps it’s taking to bolster the finance unit will help protect the dividend in 2009 and beyond.
GE rose as much as 9.2 percent in New York trading after it said profit will be 50 to 52 cents a share, in line with analysts’ average estimate. The forecast excludes a potential charge of $1 billion to $1.4 billion to speed up cost cuts, most at the GE Capital finance arm, the Fairfield, Connecticut-based company said in a statement.
The company is shrinking the finance unit, reducing leverage and cutting the commercial paper it issues, Chief Financial Officer Keith Sherin said in an interview. The unit’s profit will be $8 billion this year including the charge and drop to $5 billion in 2009, GE said today.
“We’ve made dramatic progress in our funding model,” Sherin said, who repeated the goal to keep the $1.24 a share dividend in 2009 and protect the top-level AAA rating. “We’re being realistic about this credit environment that we’re in.”
Chief Executive Officer Jeffrey Immelt is shrinking the finance units to 40 percent of GE’s profit from about half last year as he reduces debt and focuses on businesses that generate more earnings. Immelt, who will present GE’s full 2009 outlook on Dec. 16, has cut his profit target twice this year and raised more than $15 billion in cash through selling stock. He also has taken advantage of two new federal programs for financial companies as he seeks a level playing field with banks.
‘Responding to Situation’
GE had previously predicted fourth-quarter profit of 50 cents to 65 cents a share, and today’s forecast was in line with the 51-cents average of 14 estimates in a Bloomberg analyst survey. The shares rose $1.28 to $16.78 at 10:22 a.m. in New York Stock Exchange composite trading and have lost about 55 percent of their value this year.
“They are responding to the situation,” Walter “Bucky” Hellwig, who manages $30 billion at Morgan Asset Management in Birmingham, Alabama, told Bloomberg Television. The firm held 230,000 GE shares as of Sept. 30. “That is positive.”
GE Capital’s profit next year excluding the charge will be about $9 billion, as forecast, the company said today.
Loss provisions will rise to about $7.2 billion in 2008 and to about $9 billion in 2009, Sherin said. The company now plans to issue about $45 billion in long-term debt next year, less than the $66 billion it has maturing, and reduce commercial paper to $50 billion in 2009, less than the $75 billion it said previously. GE is reducing its leverage ratio to 6 to 1.
The parent company would consider adding $5 billion in funds to GE Capital to help it meet its leverage goal of 6-to-1, Sherin told investors on a Webcast today. The money would be taken from existing funds and wouldn’t require raising funding from outside the parent company, he said.
‘Well-Positioned’
GE, which reduced the amount of profit GE Capital pays the parent company to 10 percent from 40 percent, has a goal of returning to that payout in 2010, Sherin told investors. That will help bolster potential profit growth of about 10 percent in 2010 if markets begin to recover.
“We believe we have the company well-positioned for what’s going to be a very difficult cycle,” Michael Neal, the GE vice chairman who oversees GE Capital, said on the call.
General Electric said in September it would keep its $1.24 annual dividend the same for 2009, the first time in at least 32 years with no increase. The dividend costs GE about $13 billion a year based on the number of shares outstanding on Oct. 2.
The finance units known collectively as GE Capital have made a profit every quarter this year even amid the deepest global financial crisis since the 1930s, earning more than $7 billion in the first nine months of this year.
Savings Target
The results still fell short of targets, leading GE to pare costs and to say it will count on its industrial businesses such as jet engines and power generation and its NBC Universal entertainment unit for a greater percentage of its profit.
The parent company said Nov. 18 it was seeking $2 billion in cost cuts at GE Capital, net of expenses, as it pares an unspecified number of the unit’s 75,000 jobs and reorganizes to reduce the contribution of finance to less than 40 percent of sales. GE Capital last year accounted for about half of profit and sales.
Among the reorganization’s moves announced in November are three new units: a joint venture division focused on banking outside the U.S. as GE Capital seeks to grow deposits; a group comprised of assets the company has marked for divestment or run-off; and a retail finance group that includes private-label credit cards, which Immelt marked for sale last year.
The targeted $2 billion in savings is pretax and net of the costs the unit will incur for restructuring, GE said.
GE forecast in September that profit outside the finance units may rise 10 percent to 15 percent in 2009 and decline as much as 30 percent in finance.
Federal Programs
GE Capital is using two federal programs that help it sell debt, its main funding source. The first is the Federal Reserve’s commercial paper funding facility, and the second is use of debt insurance through a Federal Deposit Insurance Corp. program. The commercial paper program expires in April unless it is renewed; the FDIC debt insurance program is for issues through June 2009 and expires in 2012.
Bothe the parent company and finance arm have AAA credit ratings, the highest available. Moody’s Investors Service today affirmed the AAA rating after today’s announcements.
“GE will be able to effectively execute its plan to downsize GECC’s scale and reduce its reliance on confidence- sensitive short-term funding while maintaining solid earnings and asset quality,” Moody’s wrote today.
Immelt on Sept. 25 slashed his forecast for this year’s profit for the second time to $1.95 to $2.10 a share as the financial crisis deepened. In October, GE raised an additional $3 billion in the sale of preferred shares to investor Warren Buffett‘s Berkshire Hathaway Inc. and $12.2 billion in common stock.
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