Last week General Electric reiterated for the second time that it will continue paying out a quarterly dividend of $0.31/share in 2009. GE is going thought a difficult transition, as it is trying to deleverage and decrease the profit contribution of its GE Capital unit from 50% to 40%. Furthermore the company is also trying to maintain its triple A rating and to keep its dividend safe.
With GE’s earnings expected to be around $0.50 in 4Q 2008, the earnings per share for 2008 in total comes out to $1.88-$1.90. If the dividend is maintained at $1.24, then the payout ratio will climb to its highest levels since 2005. The deleveraging factor of 6, is a result of the company lower outstanding commercial paper balance to $50 billion from $75billion. Furthermore GE now plans to issue about $45 billion in long-term debt next year, which is less than the $66 billion it has maturing. The company received $3billion in funding from Warren Buffett and $12.2 billion from sales of common stock.
Due to the decrease in leverage it seems that the new GE that will emerge after the financial crisis is over will be different. I doubt that the new GE will be able to grow its earnings in the double digits, assuming that its leverage is lower, which allows for less flexibility to fund projects that make profit for shareholders. Furthermore given the fact that the dividend costs about $13 billion annually, I see an increased chance of a dividend cut. Just because the company reaffirms that it won’t cut its dividends, doesn’t really mean that it won’t do it two months later. Citigroup(C) and Bank of America (BAC)were two noticeable companies, whose CEO’s claimed that their dividends were safe, only to reduce them several months after those statements.
If GE doesn’t cut its dividends keep holding shares of the company, without adding any new funds to the position would be a good move. If General Electric does cut its dividends however, the wise decision would be to allocate your funds in other opportunities.
Full Disclosure: Long GE
Relevant Articles:
- Which Bank will be next? Follow the dividend cuts
- Analysis of General Electric
- Bank of America (BAC) Dividend Analysis
- Should you sell after a dividend cut?
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I hope GE is able to maintain its dividend or at least that its stock price recovers before they cut it. I bought GE because it is a Dividend Aristocrat but it looks like their days as one might not be much longer.
ReplyDeleteTFM,
ReplyDeleteI will be glad if GE just maintains its dividend. In other news have you looked into utilities and MLPs for current income?
Thanks for writing about the GE dividend situation. I have as of recently been thinking about taking a stake in GE for a verity of reasons, most importantly the dividend, but haven't moved yet. I keep replaying a quote in my head, I think its from Warren Buffett "Buying a stock for its dividend is like getting married for the sex. What happens when the sex stops?"
ReplyDeleteGE is solid company and I believe it will move away from alot of this risky stuff its been doing. The Dividends will be cut there is no question about that. Without all the financials, it will be very hard to maintain
ReplyDeleteDGI- I might add a utility or two too my portfolio eventually. I've heard the taxes for MLPs were really complicated. I have to do more research on that before I buy any. I'm not that worried about current income. I'm looking more for growing dividends for the rest of my portfolio.
ReplyDeleteThanks for the analysis on GE. I think they will eventually make the cut in 2009. As you mentioned, just like BAC did.
ReplyDeleteBill,
ReplyDeleteAs a GE holder, I would love it if the kept the dividend unchanged. I won't sell until a cut is made official. However I won't add any new money to my GE position either.
Ethan,
If it stops, you have to move on and find a new partner/investment :-)
TFM,
Have you considered KMR, which holds KMP stock. KMR pays your dividend in partial shares, so you don't have to pay taxes until you sell.
PFI,
I hope I am wrong on GE. But if I am not, then I am sure there are many other companies that will be able to increase their dividends even in this tough environment.
I still hold some shares of GE as well. Given today's news of a possible ratings downgrade I am not sure how safe the dividend is over the next year. They really need to sell off some of their divisions.
ReplyDelete