By Rachel Layne
Feb. 27 (Bloomberg) -- General Electric Co. cut its annual dividend for the first time since 1938 as the global recession and credit crunch sapped profit at its finance unit and threatened the company’s AAA credit rating.
The quarterly dividend was lowered 68 percent to 10 cents a share from 31 cents for this year’s second half, the Fairfield, Connecticut-based company said in a statement. The reduction will save GE, which has paid a dividend for 110 years, about $9 billion a year, the company said.
Chief Executive Officer Jeffrey Immelt had said in January GE would earn enough to support both the dividend and highest- available debt rating. Earlier this month, with no sign of an easing in the global slowdown, he said the board would review the dividend and that he could run GE with less than a top rating if analysts downgraded the debt. A downgrade may increase the cost of capital and further hurt profit at GE Capital.
“They didn’t make the current environment, they have to just survive it,” said William Batcheller, director of investment management at Butler Wick & Co. in Youngstown, Ohio, which has about $675 million under management. “You can’t blame Immelt that markets have come down like this.”
Moody’s Investors Service said after today’s dividend cut it will keep GE on review for a possible debt downgrade from Aaa, its highest level. Standard & Poor’s also kept GE’s top- notch AAA and “negative” outlook unchanged.
“The reduction in GE’s common dividend will address some of the concerns regarding the stress on GE’s cash flow,” said Moody’s analyst Richard Lane, who covers the parent company, in a statement. “Nonetheless, Moody’s is continuing its review of the ratings for possible downgrade.”
GE, the world’s biggest provider of aircraft leasing, jet engines, power-plant turbines, medical imaging machines and locomotives, fell 59 cents to $8.51 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have dropped 75 percent in 12 months.
The $1.24 annual dividend GE had planned for 2009 would have cost about $13.1 billion in all. The company has already paid or agreed to pay $6.2 billion for this year’s first two quarters, Chief Financial Officer Keith Sherin said Feb. 10.
In the statement, Immelt said the dividend cut is “the right precautionary action at this time to further strengthen our company for the long-term, while still providing an attractive dividend.”
Immelt also said today that, aided by the dividend change, GE doesn’t have any plans to raise additional equity. GE raised $15 billion in October from the sale of $3 billion in preferred stock to Warren Buffett’s Berkshire Hathaway Inc. and $12 billion in common stock. Buffett declined to comment about today action through assistant Carrie Kizer.
Companies Reduce Dividends
U.S. companies are reducing dividends at the fastest rate in half a century, hoarding cash and squeezing investors who depend on the payouts more than ever to boost returns. GE’s dividend has been providing a yield of about 14 percent as the shares trade at lows not seen since the mid-1990s.
GE, the only remaining original member of the Dow Jones Industrial Average, has paid a dividend to investors since 1899.
Immelt, 53, and the board are making the cut as debt ratings of both GE and its GE Capital finance arm are under review for possible downgrades. S&P and Moody’s are studying whether GE can generate the profit it needs to pay common stock holders, support the debt load and still invest as needed in its businesses.
S&P in December said GE had a 1-in-3 chance of losing its AAA designation during the next two years. Moody’s Investors Service placed GE on review in January, triggering what is typically a three-month process.
The dividend cut “helps them with the rating agencies,” said Nicholas Heymann, an analyst with Sterne Agee & Leach Inc. who has a “sell” rating on the shares. “It gives them more flexibility to be able to build necessary levels of loss reserves and loss provisions at the financial subsidiary, and that in turn is a very important component of what their ratings are with the rating agencies.”
The global recession and credit crisis may make it harder for GE Capital to meet its $5 billion profit goal this year, and growth at GE’s industrial businesses also is slowing.
The average analyst estimate for GE Capital profit is about $3.6 billion, Sherin said Feb. 10. Moody’s laid out in December the criteria GE had to meet to retain its highest rating, Aaa, including the ability of the non-finance units to produce $16 billion in cash flow as Immelt had promised.
Most of that cash would come from revenue tied to equipment such as jet engines and power turbines, plus $500 million from a reduced payment GE Capital makes to the parent, and about $2 billion from other sources. GE said Dec. 2 that would be more than enough to pay the dividend this year.
Moody’s wants GE Capital to earn enough to restore a larger internal payment to the parent company in 2010. If that doesn’t look like it will happen, Moody’s says GE can’t justify the Aaa.
Immelt has said that he and GE’s board consider the dividend a good way to return value to shareholders. More than 40 percent of GE’s holders of its 10.5 billion outstanding shares are individual investors.
GE had already broken its usual dividend practice in September, when it announced the board would keep the quarterly payout at 31 cents a share in 2009 -- the first year in more than three decades without a dividend boost. The company repeated its intention Dec. 16.
GE’s bonds have traded the past six years as if the company was rated below AAA, according to Moody’s implied ratings. The bonds imply GE should be ranked five steps lower at A2.
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