The big news yesterday was the dividend cut from on of the most prominent dividend aristocrats – General Electric (GE). The company lowered its quarterly payment to $0.10 from $0.31/share for the first time since 1938 in an effort to save 9 billion dollars annually and maintain its AAA rating.
After spending billions on stock buybacks when its stock price was high, the company sold billions in equity to investors during 4Q 2008, including a sale of $3 billion in convertible preferred stock to Warren Buffett.
There had been rumors that the company would cut the dividend payment for over 4 months; every time a rumor of a dividend cut was spreading, Jeffrey Immelt kept reassuring investors that the payment could be maintained well into 2009. Then as more analysts began digging into the company’s financials, it became widely accepted that GE had to either maintain its dividend or lose its AAA rating.
The first sign of trouble came in 2008, when GE reported its 1Q results, which were below the estimates by analysts. The company blamed its poor performance on financial services businesses, which were challenged by a slowing U.S. economy and difficult capital markets.
The second sign of trouble came in September, when the company failed to increase its dividends for the first time in 32 years. At the same time the company suspended its $15 billion stock buyback program, announced in December 2007.
Just a week after GE announced this, the company sold $3 billion preferred stock to Warren Buffett, yielding 10%. In addition to that the company sold an additional 547.8 million shares for approximately 12.2 billion dollars to shareholders.
The CEO kept reassuring investors that everything was ok and that both the AAA rating as well as the dividend could be maintained. The markets didn’t trust him, and GE stock lost almost half of its value in he first two months of 2009.
Another note on the CEO is that he kept buying GE stock all the way down. Many investors viewed his acquisitions of 150,000 GE shares on the open market in the first quarter of 2008 as bullish. This goes on to show that investors should treat insider purchases with caution, and not automatically view them as a bullish signal.
As a result of the dividend cut, I disposed of my whole GE position during the day. The company no longer fits the dividend growth stock characteristics, for which I bought it in the first place. Despite the fact that I am a buy and hold investor, I realize that I would still have a turnover in my portfolio, even if I select my purchases from elite lists such as the dividend aristocrats, dividend achievers and the dividend champions.
I continue seeing a lot of companies increasing dividends in 2009, so I still have a faith in dividend investing.
- Analysis of General Electric
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