By Rachel Layne and Peter Robison
March 9 (Bloomberg) -- General Electric Co.’s Jeffrey Immelt says he’s prepared to steer through a financial “armageddon” that has wiped out 78 percent of GE’s market value in a year and forced its first dividend cut since the Great Depression.
“You’re talking to somebody that earned $18 billion last year on $183 billion in revenue, that’s outperformed the S&P 500 from a revenue and earnings standpoint over the last five years,” the GE chief executive officer said in a March 5 interview, his first since the dividend cut on Feb. 27. “But I don’t think any CEO worth his or her salt can sit back and say, it happened to everybody so it’s okay.”
GE’s reduction of a dividend that had grown since 1938 unleashed a market rout that sent the stock price last week below $6, the price of some GE light bulbs. A downgrade of the company’s Aaa credit rating by the Moody’s Investors Service may come as early as this week.
The company has come under attack from some investors, analysts and the media for a lack of transparency at GE Capital, the finance arm at the heart of the stock decline. Investors fear the unit, already facing rising credit-card delinquencies and $4 billion in unrealized property losses, will require more capital than GE now anticipates.
“If you look at this management team’s track record since July of last year in predicting whether or not they need equity, the one thing you can be very certain about is, if they say they don’t, they will,” said Charles Ortel, managing director of Newport Value Partners in New York, who advises hedge funds to bet against GE stock.
Counting on Dividend
Immelt, 53, said Jan. 23 he saw no need to cut the dividend. His reversal after the economy worsened left some individual investors, who comprise 40 percent of the shareholder base, saying they felt betrayed.
“We were counting on the $50 per month dividend,” said David Dill, 78, a retired engineer in Santa Barbara, California, who five months ago bought 500 GE shares for $22 apiece, about the same price as warrants taken by billionaire investor Warren Buffett last year. “We are average folks and every source of just $50 adds up to pay steady monthly bills.”
The motivation, GE’s lead independent director Ralph Larsen said in an interview, is to preserve cash. Cutting the annual dividend to 40 cents a share from $1.24 saves GE $9 billion, which it can use to shore up the finance unit.
“That was a source of agony for us as a board and for Jeff,” Larsen said of the dividend cut, adding that Immelt has the board’s “complete confidence.”
“The worst thing you can do is run out of cash, because nobody’s going to lend it to you when you need it,” Larsen said. “We made the tough call and the history books will judge us.”
Former GE chief Jack Welch, who presided during the longest peacetime economic boom in U.S. history in the latter part of his tenure, said he has watched his successor, Immelt, grapple with a far less ideal business climate. As U.S. unemployment topped 8 percent and home foreclosures rose to records, GE’s stock closed Friday at $7.06, down from $40 when Immelt took over in 2001.
“We picked him, we like him, and I have nothing to change that view,” Welch said in an interview. “He’s involved in a very difficult, once-in-a lifetime situation. He will work his way through with a great team.”
With $637 billion in assets, the GE Capital finance arm is similar in size to the sixth-biggest U.S. bank, according to CreditSights Inc. GE’s financing of everything from manufactured homes to railcars provided more than 50 percent of profit in recent years, more than the aircraft engines, appliances and power-plant turbines for which the 117-year-old company in Fairfield, Connecticut, is better known.
GE says its finance arm will earn $5 billion this year, even accounting for the absorption of $10 billion in losses mostly from its consumer division.
“The whole damn stock market’s down 50 percent. We’re down 75 percent, okay? We don’t like where we are but it’s not like anybody’s feeling the groove right now,” Immelt said in the interview in his office at 30 Rockefeller Plaza in New York.
Immelt and GE have gone on the offensive to defend the company, agreeing to an interview and putting finance chief Keith Sherin on the company-owned CNBC network to declare last week there were no “time bombs” in the finance unit. Immelt also appeared at a JPMorgan Chase & Co. session in front of 250 CEOs in New York last week.
“He hasn’t been the guy watching the train coming down the tracks,” JPMorgan CEO Jamie Dimon, a friend of Immelt’s since his wife shared classes with the future GE chief at Harvard Business School in the 1980s, said in an interview. “He’s moved and bobbed and weaved.”
After injecting $9.5 billion in GE Capital this quarter, GE will have added $15 billion in capital to the finance unit in the past six months to reduce its debt-to-equity ratio to 6-to-1 net of cash. The finance arm now has $63 billion in equity, $34 billion of tangible equity and $36 billion of cash, GE said last week. That gives GE Capital a 5.3 percent ratio of tangible common equity to assets, in line with most banks.
In Mesa, Arizona, GE is taking other steps to protect its interests. Brad Nikolaus, who sells manufactured homes in one of the states with the highest foreclosure rates in the country, says a GE account manager visited him last month and told him the rate on financing he uses to keep homes in his showrooms would increase on March 1 to 7.56 percent. That increases his monthly interest bill to $95,000 from $65,000, at a time he’s already selling homes below cost to survive, he said.
“Does GE have hope in the future of our industry?” asked Nikolaus, president of Associated Dealers Inc. “You know, they’ve raised the rate up that huge percent, you’ve got to wonder if they’re just trying to put something in the kitty to prepare for what’s going to come.”
Immelt has confronted crises from almost the first moment he became CEO, four days before the Sept. 11 terrorist attacks, which could have crippled two of GE’s biggest businesses, aviation and insurance.
He moved to get GE out of volatile industries, shedding all $150 billion in insurance assets, a plastics unit before oil prices made producing the raw material too expensive and Japanese consumer lending. He sold a unit in Burbank, California, that loaned money to subprime borrowers in 2007, before the extent of the credit crisis became known. The next year, Immelt began shopping for offers on its credit-card unit.
In April 2008, GE reported a quarterly profit decline just months after Immelt had said his forecasts were “in the bag” and weeks after the Federal Reserve was forced to rescue Bear Stearns Cos.
The seize-up of capital markets forced GE to write down the value of some loans and thwarted asset sales, the company said at the time, which proved to be only the beginning of further turmoil that led to the bankruptcy of Lehman Brothers Holdings Inc. in September.
Wearing a Suit
“From Sept. 15 of last year, every day is a week, every week is a month, every month is a year,” Immelt said in the interview. One hint of the brutal pace: He said he couldn’t recall a day in that period he hasn’t worn a suit to the office, because news events might prompt an unscheduled television appearance or a visit to Washington.
On Sept. 25, GE reduced its annual profit forecast for a second time and suspended its stock buyback. A week later, GE got a $3 billion investment from Buffett’s Berkshire Hathaway Inc. and said it would sell $12 billion in common stock.
“That was a bold and insightful move” on Immelt’s part, said Bob Spremulli, managing director for research at TIAA-Cref, which owned 74.1 million GE shares at the end of 2008. “Some people didn’t do a capital raise and they’re paying the price.”
In January, Immelt moved GE’s annual retreat from its usual location at a resort hotel in Boca Raton, Florida, to the John F. Welch Leadership Center in Crotonville, New York.
Arrayed around him in a sunken conference room called “the pit,” Immelt told the managers they’d all made a mistake when they didn’t anticipate how bad the economy would get. Now he urged them to roll up their sleeves and deliver. GE Vice Chairman John Rice said he spent an afternoon working on ways to generate more cash from his businesses, which include health care and aircraft engines.
“The second you go outside, we’re going to be back again in the worst environment of your lifetime,” Immelt said, according to a transcript provided by GE. “We’ve got to fight hard to protect our reputation.”
Things Get Worse
Within weeks, it got even worse for GE, Immelt and the American economy as GE cut its dividend. Because the company’s operations are so diverse, investors often view it as a proxy for the U.S. economy and some say a ratings cut represents a negative judgment on all of American business. Buffett called GE “the symbol of American business to the world” in October.
In February, GE said Immelt waived a bonus and incentives worth at least $11.7 million for 2008. His salary was $3.3 million.
As of March 6, credit-default swaps, contracts that protect bond investors against default, on GE Capital were about as expensive as those for building materials-maker Louisiana-Pacific Corp., which posted nine straight quarterly losses.
“Somebody has always known something,” said Bill Fleckenstein, president of Fleckenstein Capital in Seattle. “The market was correct with Ambac, MBIA, AIG, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup,” he said, reeling off the names of financial firms that either failed or sought capital. “Maybe GE.”
Fleckenstein, whose fund in the past sold stocks short, or bet on declines, said he doesn’t have a position in GE stock.
Immelt called the speculation “blather” in the interview. “We’re the last remaining finance company,” he said. “We’ve kept the company safe and secure in really an armageddon case in financial services.”
As for credit default swaps, he said investors can force substantial price moves “by spending 25 million bucks in a handful of transactions in an unregulated market. I just don’t think we should treat credit default swaps as like the Delphic Oracle of any kind. It’s the most easily manipulated and broadly manipulated market that there is.”
GE scheduled what it calls a “deep dive” meeting to explain GE Capital’s liabilities for the week of March 16.
Immelt said he also plans to bring more of what he called “naysayers” to speak to GE managers at planning sessions and make sure they’re asking the right questions. For the field visits he typically makes to customers and salespeople, he’ll turn his focus inward this year to teams that manage cash and receivables, he told managers at Crotonville.
Like most CEOs, Immelt said, he’s worked weekends and long hours since September. At home, he sleeps -- when he can.
“Sleep comes tough, because you’ve got a sense of what you go to bed with the night before and what you might wake up to the next day,” he said.
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