24/7 Take: GE “AAA” vs. GE 10% Dividend Yield (GE)

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Today, I was asked by CNBC to opine on the credibility over General Electric Co. (NYSE: GE) earnings reaction in the stock, but specifically about the dividend that is now 10% and the “AAA” ratings from the debt ratings agencies.Joggcnbc_2To view the the interview go here

First and foremost, Jeff Immelt needs to get himself out of the hole he dug by insisting that its common stock dividend was a safe and absolute commitment. Today he made a far “lighter defense” of that dividend today than he has in recent weeks. No company with a “AAA” rating or a “AA” rating needs to have almost a 10% dividend yield. The company needs to slash that by 40% down to just under 6%. That will give it an extra $5 Billion this year. And there is some magic here… Immelt can simply say “We will take it right back up when times get better, but this preserves our balance sheet.” We think Immelt will do this as soon as Q2. And he might defy us and the skeptics.The “AAA” rating is sort of a farce right now. No one cares about the debt ratings agencies now that they rated everything under the sun with a “AAA” rating that only added fuelt o the fire in CDO’s and other packaged derivatives that helped contribute to the blow-ups out there. But the company does need to at least keep its financial integrity to where it has the best books of all conglomerates and of all companies in corporate America.GE has two options here. It either needs to be able to imply that it will have more government guarantees of some sort or it needs to be able to convey that it has no need of further government funding. Immelt said it has 60% of its funding needs met and we are only in January, but Wall Street is proving to be its fickle self.GE has many problems. It is a conglomerate and it is involved in many aspects of the economy. There are still some calls to break it up. Now that its stock is down so much it would literally have to do something crazy with reverse splits before breaking itself up. The company couldn’t unload its appliances and lighting units. So it has to ride the current times out in its existing structure.Unfortunately, there are no major secret weapons. There are hard times, and there are really hard times. We are actually just formally entering the “really hard times” as no companies can offer guidance beyond a week and every economist in America expects things to keep getting worse before they even stabilize. Whenever the recovery phase comes, we have already had two bellweather companies named Intel and Microsoft tell you that the new baseline that will bve used to measure growth is at a lower hurdle.GE is not immune. But GE is still making money. For now, it still has a Triple-A. And when things do finally turn, it is likely that GE will be better positioned than many of its competitors in many segments in which it operates. There are just some tough decisions that have to be made. Some will be very tough decisions. Yes, those will involve more pink slips being sent to workers. If it cuts that dividend, then some of the problems will be able to correct themselves.Jon C. Ogg