Hot off the market-crashwire (TM): GE, previously one of the world’s largest companies by market cap, had fallen more than 9 per cent in Monday trade. The stock broke below $8 per share for the first time since 1994 following news on Friday that the conglomerate would be cutting its annual dividend for the first time since 1938.
The big fear, of course, is that GE — seen as a bellwether for the US economy — may not be able to defend its triple-A rating. A downgrade would put significant pressure on its already struggling financial arm GE Capital, which is at risk of tripping a fixed-charge covenant on its debt. As the FT wrote on Tuesday the current financial crisis has transformed GE Capital from being the profit engine that powered the company’s stock price to the company’s key liability.
Here’s the latest from Bloomberg:
March 2 (Bloomberg) — General Electric Co. fell below $8 in New York trading for the first time since December 1994 as investors bet earnings power will continue to erode amid the worst economic conditions since the Great Depression. GE, which cut its annual dividend on Feb. 27 for the first time since 1938, declined 68 cents to $7.83 at 10:43 a.m. in New York Stock Exchange composite trading. Shares last dipped below $8 on Dec. 13, 1994, according to Bloomberg data. The dividend cut may not be enough to stave off a potential debt ratings cut by Moody’s Investors Service and Standard & Poor’s Corp., analysts including Citigroup Inc.’s Jeffrey Sprague and Sterne Agee & Leach Inc.’s Nicholas Heymann said in notes to clients.
Reducing the payout should save about $9 billion annually, GE said Friday. Moody’s and S&P have both rated GE as AAA, their highest available, for decades. “We don’t expect the dividend reduction to translate into a corresponding increase in liquidity, since we never expected GE’s cash flow from operating activities in 2009 would adequately fund GE’s prior dividend payouts,” Heymann wrote in a note to clients today. He rates the company a “sell.” The quarterly dividend was lowered 68 percent to 10 cents a share from 31 cents for this year’s second half, Fairfield, Connecticut-based GE said in a statement last week. Today’s GE share drop came amid a broader share decline for U.S. stocks. The Dow Jones Industrial Average and S&P 500 stock index each dropped more than 2 percent.
Related links:
GE denies unit needs more cash to cover debt – FT
GE to inject finance arm with $9.5bn cash – FT