How Far Could $5 Billion Go?

Dow Chemical Co. (NYSE: DOW) probably would have had a much better day if the market did not plunge at the end of the day.  In university finance classes they teach you that cutting dividends is a bad move, but that isn’t the case when the yield has gone parabolic and when companies have to go into preservation mode.  This is something that we suspect General Electric Co. (NYSE: GE) will follow soon.

The chemicals giant announced a 64% reduction to its dividend.  The prior payments were $0.42 per quarter.  That $1.68 per year was currently giving a 16% yield.  The new rate is $0.15 per quarter, which comes to $0.60 per year.  Based on a closing price of $10.04, its new yield is right around 6%.  The savings here could reach about $1 billion per year.

Again, we are telling you (and we are really telling G.E.) that their dividend is just way too high for the current market.  3M Co. (NYSE: MMM) recently hiked its dividend, but it was a small hike and its dividend is now close to 4%.

Our call is for G.E. to cut that $1.24 dividend down in half… or even by 40%.  With 10.5 billion shares, GE could save over $1 billion per dime it trims from that dividend.  A billion is not what it used to be, and with a balance sheet this size it may seem like a line-item.  But a few billion here and a few billion there becomes real money after a while.  Particularly when costs in other areas are getting harder and harder to cut.

We think Immelt signaled and hinted at final dividend capitulation when the company recently reaffirmed its Q2 dividend as the comments were for the first half.  This still yields in excess of 10% today.

GE can cut its dividend in half with a promise of returning to a more premium level when the markets and the economy normalize.  At the current rate, this would be a saving of well over $5 billion.  Actually, over $6 billion at the current rate.  The ratings agencies would applaud the lower “capital outflows to common holders” as it would go toward the company’s funding needs.  That is our take anyhow.  Bear markets and preservation perceptions require different theory and different practice than when a boom is in place.

The timing is also everything.  If it is announced on top of other bad news or in the middle of a horrible market day, then it likely won’t get the proper reception.  Dow’s stock would have likely closed higher today if the market was not looking like another down dead day.  Dow did recover to end up flat.

Jon C. Ogg
February 12, 2009

The second issue is that GE will benefit from the  government stimulus package and the Treasury financial bailout package due out tomorrow.  These are known by most, but this stock unfairly punished given its current situation.

We saw a 13.6% move in December 2008.  And from the low to high, not counting the closes, there was a larger move than that in a two-day period.  But today’s 13.87% gain to $12.64 may be the largest one-day gain in many many years.  The gain in December was a 30-year record.  Today’s gain was larger.  CNBC went all the way back to 1962 and had not found a day where GE had risen this much.  Most traders and investors were not trading and investing back in the 1970′s, let alone the 1950′s.

We feel that GE will cut that dividend with a 95% certainty after Q2.  It has a “AAA” debt rating to try to maintain.  But here is our other call… If you buy GE you have to understand that the ratings agencies have already announced actions.  They haven’t formally downgraded the debt rating, but if you live by reading between the lines it doesn’t take a rocket scientist to guess what the next most likely move is more likely to be a few months out.

Shares closed up 13.87% at $12.64 on more than 230 million shares.  Its 52-week trading range is $10.66 to $38.52.  Today’s move added roughly about $14 billion in market cap.

Jon C. Ogg
February 9, 2009

General Electric Co. (NYSE: GE) falls in this camp and its credit default swap spreads have been hit along with every other company that is tied to financial companies or that does business with them.  GE is one of the few companies left with a solid Triple-A rating, and the company has been very clear about its intent to keep it that way.  As these credit spreads have been hitting new historic highs today, we asked our contacts at GE to comment.

Our company spokesman contact there sent a response to the currentsituation to us.  "We are committed to the Triple A, we have strongcash flows from a diversified portfolio, and even in this difficultenvironment the Triple A remains secure."  He further added,"GECapital’s cash bond spreads are trading significantly tighter thanmost major financial institutions.  Unlike these financialinstitutions, our cash bond spreads are significantly tighter then ourCDS spreads.  GECapital is part of the CDX and most other financialinstitutions are not, so when investors hedge the index, anticipatingwider bond spreads for the market as a whole, our CDS naturally widens."

The market throwing the baby out with the bathwater is bad enough.  What ishappening in the markets right now is even worse and it is punishingmajor financial and non-financial companies that do not deserve it.  GE’s stock isdown under the face value prices of the post-recession lows in 2002 or2003 and is actually getting close to those same lows if you adjust for dividends.  On September 8, the stock was above $29.00.  Shares went under $23.00 at the worst part of the market today. Do the math, that is a 20% haircut.

Many have attacked the giant conglomerate’s structure and when I was previously onCNBC as a guest I said that breaking the company into independent units was solely a bull market call.  I went to addthat everyone would be wishing for that conglomerate structure again ifand when the economy tanks. There are major problems in the economyand there is no way that some of the old rules and old trends willreturn in the same manner as before.  But hitting some of these companies has become far too harsh.

We recently gave a preview for our Special Situation newsletteroutlining even after all the bad cases we are factoring in for all large companies and for the economy that GE’sbase-case value for 2009 could be $30.00, and that number could be higher.  Our prior fair valueanalysis after its warning was $33.75.  If things in the economy stabilize or normalize, you can make the case that GE’s stock could run back to $35.00 or higher.  If this selling gets worse, then of course the law of percentages will bring those targets down.  But this is the general idea. 

Enough is enough.  The stock market and credit markets can take a greatcompany like GE lower and lower.  That is the environment we are in andwe can’t make any major alterations to the market or to sentiment.  Butreally, enough is enough.  Right now the fear has simply gone farther than fear itself.  If anybad news comes out in the coming days from GE it should be priced in the stock.  Of course, the caveat to is that the market has proven it has no remote ties torational markets nor to efficient market theories.  Anyhow, enough isenough even under the de-leveraging climate we are entering for theforeseeable future.

• See CFO Keith Sherin’s exclusive comments to 24/7 Wall St. regarding his long-term growth targets.

Jon C. Ogg
September 17, 2008

There were some key analyst calls this last week ahead of Tuesday’s event, although these are very short summaries and other reports may have been issued:

• Last Monday Citigroup maintained its Buy rating but actually lowered some of the 2008 earnings per share targets down to $2.45 from $2.50 and took its price target down to $45.00 from $48.00.
• On Wednesday, Deutsche Bank also maintained its buy rating, but slightly lowered estimates and took its $47.00 price target down to $44.00.
• Lehman reiterated its "Overweight" rating on Thursday but took its target down from $48.00 to $45.00.

The good news is that the bar has been lowered.  The bad news is that the negative sentiment has crept into the stock as General Electric won’t be entirely immune from what is almost a certainly weak US consumer in 2008 despite strength in international orders, airline engines, power stations and other areas.   GE’s stock chart is also under pressure now that it broke under and was unable to stay above its 200 day moving average ($37.79) for a second time.  That adjusting level may act as some larger resistance the second time around.  Shares were challenging $42.00 just two-months ago.

We are still impressed that the company thinks of itself as a growth company with plans for 20% return on capital.  That isn’t a mandatory target every single quarter nor likely is it a firm commitment every year, but it’s still impressive for a company worth $376 Billion in market cap.

So the bar has now been lowered.  We’d also expect more of the same from analysts lowering price targets or earnings per share targets on Monday and Tuesday ahead of the event.  They don’t always act in unison, but the pack mentality seems more frequent than coincidental.

• Siemens is putting on some pressure.
• GE’s LAST EARNINGS GUIDANCE.
• Chairman & CEO Immelt bought GE shares recently.
• GE’s last presentation on a "Pretty Good: Economy.

Jon C. Ogg
December 9, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

My partner broke out the numbers and saw that operating income lagged revenues growth.  He isn’t all that impressed.  Personally, GE’s earnings are almost always a mixed bag.  There are so many items in each quarter and always some moving parts that are viewed individually as good or bad.  This just depends if you see it half full or half empty.  My take is that with everything in-line and the reaction almost always being muted, this quarter was fine.  The company repurchased $6.3 Billion in stock for the quarter and will repurchase $5.7 Billion of stock in the fourth quarter.  Ths one boils down to interpretation and final opinions.  To me this looks fine, but there probably aren’t going to be any vigilant analyst calls either way.  This has so many moving parts that it just boils down to opinion.

Other issues ahead of earnings:

• The company is rapidly growing by acquisitions into the oil and gas markets.
• We have noted how recent strength was essentially 5-year highs in the stock.
• Recent financial changes were essentially immaterial.
• The outlook ahead will be without the plastics unit after the sale closed.

Jon C. Ogg
October 12, 2007

First Call estimates are now $0.50 EPS and $42.4 Billion in revenues, but this look like it is adjusted downward to account for the plastics unit and for exiting Japanese personal loan operations and for items rather than a mass exodus on earnings.  Prior to the changes, the range given was $0.54 to $0.56 EPS on total revenues of approximately $42 Billion, with net earnings of $5.5 to $5.7 Billion.  The truth is that in modern history the company is never really that far off and the one-time items are going make this harder to look at for the quarter.  It previously offered $2.18 to $2.23 for Fiscal 2007, and we are going to be focused on the guidance more than on the past.  We backed out the charges for restructuring and divested operations, but the number here appears to be one-penny lower now after backing out items with the new Fiscal 2007 estimate at $2.20 and revenues of roughly $171.4 Billion.

The stock is within 1% of multi-year highs, but the stock has more or less been trading in a $41 to $42 trading range for most of the last three weeks.  Analysts have an average target of $44.00 to $45.00, depending on which targeting sources you use.  With the favor going back into mega-cap stocks and with the shares within $2.00 to $3.00 of the targets, it is actually fathomable to see targets raised if the company offers some formal 2008 targets.  If that happens a new target range is likely to ratchet up to a $46.00 to $48.00, but understand that is purely for conjecture at this point.  We won’t have an exact number until today’s close, but as of mid-morning today it appears as though options traders are only factoring in up to a 1% to 2% price change in either direction.

To make matters more complicated on a longer-term basis, the Financial Times yesterday broke news that GE’s NBC unit "MAY" be up for review for a spin-off.  This is noted as being a post-Olympics decision for 2008, and we have noted that an entire spin-off might be better in pieces.  This is not a full break-up of the company like we said would be a bad idea on CNBC.  We’ll also look to see if the Boeing Dreamliner delay yesterday has any impact on its jet engine business and service contracts like it did on other suppliers.  There are other key issues to watch:

• The company is rapidly growing by acquisitions into the oil and gas markets.
• We have noted how recent strength was essentially 5-year highs in the stock.
• Recent financial changes were essentially immaterial.
• The outlook ahead will be without the plastics unit after the sale closed.

If you’d like to see a preview we did ahead of last earnings you can see it here.

Jon C. Ogg
October 11, 2007

There were some concerns on the street up until yesterday that the company might have some weakness in its consumer exposure in appliances and finance, but CFO Keith Sherin addressed analysts yesterday and maintained prior earnings guidance in his "pretty good economy" explanation.  That has acted as the catalyst along with a FOMC decision to cut Fed Funds and the Discount rate by 50 basis points. 

GE remains one of the few AAA rated debt rating companies out there.  Analysts still have an average price target of $44.00.  Just this morning, Goldman Sachs noted that the company is well positioned to benefit from leadership in infrastructure, across energy, aviation, transportation, oil & gas, water, and financial services.  Goldman Sachs also noted that the exit from Japanese consumer finance is not surprising.  Goldman Sachs does note that it expects investors will be challenged to understand all the accounting nuances "impacting an array of offsetting gains and charges across Q3 reported earnings versus continuing operations."  Goldman Sachs remains with targets for earnings of $2.21 in 2007 and $2.45 in 2008.

Regardless of outside analyst calls, GE is a company that is just hard not to be impressed with.  After a semi-private luncheon with CFO Keith Sherin in July, it was hard to not be impressed with Sherin’s stance that "GE is a growth company" on numerous occasions.  I would have classified it as more of a cyclical or income play because of the conglomerate nature.  But Sherin stated that the company seeks a 20% return on capital across the spectrum and they review all segments with that target in mind.  If that isn’t attainable, then a divestiture of an underperforming operation becomes much more likely.   If you look at what the conglomerate is doing in oil and gas now, you’ll think they plan to get quite large there.  Anyone hearing the entire presentation from management will dismiss any of those old break-up calls.

Any time these giant stock hit new highs, it is never out of the norm to see some profit taking.  With a now $429 Billion market cap, it takes quite a bit of cash inflows to move the stock up.  Nonetheless, it would appear that the floor is now much higher than just a month ago.  It is also worth noting that stocks that exceed old highs tend to do that for more than just one day.

Jon C. Ogg
September 19, 2007

Jon C. Ogg produces the 24/7 Wall St., LLC Special Situation Investing Newsletter; he does not own securities in the companies he covers.

Back then it showed projections of $0.54 to $0.56 EPS on total revenues of approximately $42 Billion, with net earnings of $5.5 to $5.7 Billion.  There appears to be no change to its Q3 reported earnings and total year guidance.  This new slide shows the same $0.54 to $0.56 EPS guidance, up 15% to 19%.  It is also offering $2.18 to $2.23 for Fiscal 2007.  We backed out the charges for restructuring and divested operations. 

As far as how this compares to estimates, these numbers are mostly in-line.  First Call has $0.55 EPS and $42.69 Billion in revenues.  As far as total fiscal 2007, First Call lists $2.21 as the EPS target and an implied $171.75 Billion revenues.

This should come as a relief at a time when investors are trimming risk and when companies are facing a rougher time.  After speaking with several investors and several counterparts out there, we all had a feeling that maybe GE’s infrastructure business might not be quite to offset some of that weakness tied to housing in its appliances and in financing out there.  If the overall economy isn’t going to deteriorate much further, that worry appears to be alleviated. 

If GE shares can hold this 1.3% gain at $40.70, this will be within a hair of its $40.82 highest close of the last 52-weeks. The intraday high this year is $40.98.  If this tone remains in individual unit presentations, then it would seem likely that analysts will reaffirm or maintain their ratings and that average $44.00 price target.

This morning CFO Keith Sherin appears to have cut off these fears atthe pass.  He did note that the company is watching the impact ofhousing, but countered that by noting the broad industrial economy isstill in good shape.  As a repricing of risk has taken place, GE is oneof the few remaining Triple-A rated companies by ratings agencies.Later on there is a signal that while the Global consumer is doingwell, tougher US consumer would drive expectations of higherdelinquencies and losses.  Restructuring actions in the third quarterare estimated at $1.7 to $1.9 Billion.

Perhaps the saving graceboils down to the global nature of the company.  It shows the GE Moneyunit with 30% of its earnings coming from high value US consumer,another 30% from Latin America, Asia, and Eastern Europe, and then 40%from developed markets of Europe, Australia, and New Zealand.

The projections for percentage of profits is as follows:

Unit……….% of Profit…Stronger business position (2008 outlook)

Infrastructure 37%…Great position in robust global market…"early innings"

Com’l Finance 20%…Leading global commercial finance

GE Money      13%…Great global position & record; reduced risk & improved strategic position

Healthcare    11%…Strong global position; OEC hipping in Q4-07; DRA still tough but better comps

NBCU            11%…Strong Cable & Film; network turnaround progressing

Industrial    8%….Plastics complete; building high-tech & brand position

If you wish to review the whole presentation summary in detail you can on their site here.

Jon C. Ogg
September 18, 2007 

Let’s assume for a moment that we forget about the discussions leading to delays that have been perpetual.  Let’s for get about the political side of nuclear power.  Lets forget about killing land under mountains where we’ll bury the stuff in Nevada.  And let’s forget about the potential environmental catastrophe that can result if something goes horribly wrong.

There are many stock plays in the U.S. alone that will be huge beneficiaries of this if even one nuclear power plant approval goes through.  If there is one, why not the full dozen of them.  Here is the lot of companies:

Shaw Group (NYSE:SGR) is perhaps the most vertical of the engineering and construction firms.  Fluor (NYSE:FLR) is also in there.  And we can’t leave out the monster General Electric (NYSE:GE) for new reactors, nuclear fuel, reactor services and performance services.

Cameco (NYSE:CCJ) out of Canada is THE go-to behemoth in the stock market for Uranium miners and producers.  The much smaller company in the US is USEC (NYSE:USU), although its shares were hit exceptionally hard Friday after testing started.  Some more smaller and much more speculative stocks in the sector are Uranium Resources, Inc. (NASDAQ:URRE), U.S. Energy Corp. (NASDAQ:USEG), Uranerz Energy Corp (AMEX:URZ), and even Canyon Resources Corporation (AMEX:CAU).  Mosaic (NYSE:MOS) and CF Industries (NYSE:CF) are stealth plays in the sector that can enrich uranium from phosphate, but you should know that prices have to be very high and have to be expected to remain very high for quite some time for those to be cost effective.

The Economist recent magazine cover also flaunted a comeback for nuclear power.It said America’s nuclear industry is about to embark on its biggestexpansion in more than a generation. This will influence energy policyin the rest of the world.  CNET today discussed the wave of coming applications for more nuclear power plantsthat are coming. Personally, I’m a believer in this.  No greenhousegases, no pollution, no icky air around the place.  But the dark sideis not Three Mile Island.  That was nothing.  The dark side isChernobyl and a vast area of land that won’t be habitable forgenerations and generations.  The other thing that might act as apossible lid on investors reviewing nuclear power stocks this timearound is that local gas prices for your car are far lower than earlier this year when energy prices were rising but not as high as the $80.00 seen this week.

No wonder Merrill Lynch got creditfor what seemed to be overly bullish analysis that ended up lookinglike they had a crystal ball for a few months.  They gave a huge safetynet for uranium prices. The Canadian National Post also gave some buyout picks in the sector based on Raymond James analysis.

Nuclear power plants are coming online more and more in China andIndia, and Japan and France are largely dependent upon the glowinggreen juice to power those nations.  Russia is showing it is expandingnuclear power use again and South Korea is expanding its program.  Noneof us in the Western hemisphere are going to be too excited about this,but the chances that we are going to have to deal with a nuclear-usingIran is getting larger instead of smaller.

Back in August an ETF was launched as the Market Vectors Nuclear EnergyETF that launched on the American Stock Exchange under the "NLR" ticker, but only a portion of these stocks in here are US-based and many names wont be familiar.  Here is the full list of the company stocks in the ETF.

Jon C. Ogg
September 14, 2007

Jon C. Ogg can be reached at jonogg@247wallst.com; he produces the 24/7 Wall St. Special Situation Investing Newsletter and does not own securities in the companies he covers.

This may actually help some of the IPO’s out there if this stability in the market and a solid IPO close can come.  There are some negatives out there as it was pointed out how GE represents almost 75% of Genpact’s business and with GE still owning more than a 20% stake.  Most of these ex-Conglomerate subsidiaries tend to do well in the markets, so barring the cautionary stance it seems hard betting against one of the spin-offs with "Gen…" in the name.

GE’s business contract runs to 2013 according to the prospectus.  Shares traded over 18 million shares today.

Jon C. Ogg
August 2, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.