We already noted what is happening to the General Electric Co. (NYSE: GE) dividend. The company’s plans to save $9 billion from the $0.31 dividend cut being taken down to $0.10 is much more than what we were expecting. We expected “only” a cut by half. But there are many more issues that could be coming down the pipe.
In this last week’s “10 Stocks Under $10” subscriber newsletter, we noted that the stock was looking like traders and investors could finally start nibbling over the coming months. This was based upon price and upon a longer-term buying- in process rather than trying to catch a falling knife. We still expect “negative headlines” to come. We do not want to be reckless in predictions, but we do have some key assumptions that we feel are already built into the stock.
This is going to sound like heresy, but we are just going to address it. GE still has a TRIPLE-A rating from Moody’s and S&P. We have not been told this by the ratings agencies (particularly since we bash them all the time), but we are assuming that the TRIPLE-A rating will not be around forever. There are things that G.E. could do further to protect that rating. Moody’s put out a “still under review” notice within about an hour of yesterday’s dividend cut. We hope we are wrong in this assumption in evaluating our position here. We believe that the last two analyst downgrades that were over the same things we have discussed over and over were about as late as the notion that maybe you better pay down your high interest credit cards.
Another bit of heresy. We are just already operating under the assumption that a member of senior management will not be there for much longer. I personally do not endorse that notion. But the drop here has been too big to ignore and the calls for change have been frequent. We just won’t be be shocked at all if there is a big change in management announced fairly soon. Again, this is one of the assumptions that new investors wanting to buy G.E. stock should consider.
Earnings metrics… First just address earnings for all of 2009. GE’s consensus estimate from First Call is $1.26 EPS. Just 3 months ago, the consensus estimate was $1.75. This estimate hasn’t come down in the last few weeks.
Who here would be surprised if GE makes new earnings assumptions? Even if it does not, ask yourself if you would be shocked if analysts take those numbers down further. This should already be factored in.
Capital… The good news is that in the official statement, Immelt said that the company has no plans to raise more equity. Now here is the deal. We actually expect more capital to be raised. That might not be equity. That could be in units or lines of business. It could come from a thousand sources. We have just already factored it in mentally. They may prove us wrong.
Customers and credit… We have seen more credit erosion than we want to discuss. Trust me, it is depressing covering it. Airplane orders, infrastructure projects, alternative energy pacts, oil exploration, are all under pressure. How many delays or cancellations does it take before deciding that you could expect even more issues to be passed on down the line toward GE’s units? The good news is that if this holds up on a performance metric better, then there will be a pleasant surprise.
All of the gloom and doom should already be baked in the cake. But there is one distant outlier that is not. We want to say up front that NONE of the analysts covering it have made this call. What if the company managed to post a loss from operations ? That would not be factored in by our estimates. We won’t be shocked if and when Immelt and friends in the company talk down numbers, although, again, we do not expect any “loss” scenario on earnings.
Here is a part of what the statement from Immelt: “We have made tremendous progress in strengthening GE’s balance sheet to ensure that the Company is well-capitalized and with access to ample liquidity… At the February 6 Board meeting, we announced we would evaluate the dividend for the second half of 2009 in light of current market conditions. After extensive review, we have determined that reducing the dividend, while still maintaining it at a competitive level, is a prudent measure to further enhance our balance sheet and provide us with additional flexibility for potential future opportunities. With these actions and the others we have taken to keep the Company safe and secure, we currently do not have any plans to raise more equity.”
We will be addressing this position again in the “10 Stocks Under $10” newsletter this weekend. We do not expect any miracle cures in the world and we are not expecting everyone to benefit from the changes that are coming. That is one of the reasons that we have a balance between positive and negative calls in the newsletter.
Jon C. Ogg
February 28, 2009
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