General Electric (GE) may have reported fourth-quarter earnings in line with expectations on Jan. 23. But that did little to calm investors fretting about losses in its credit business and canceled orders hitting its large-equipment unit. Most of all, they're worried about the vulnerability of the blue chip company's dividend and AAA credit rating. The stock was down 11%, or 1.49, to 11.99 as of 3 p.m.
GE shares had fallen in recent weeks—shares are down more than 60% over the past year—following the December move by Standard & Poor's to change the outlook for GE's AAA rating from stable to negative. That left investors considering two possible ramifications: If Chairman and Chief Executive Jeffrey Immelt were to cut the Fairfield (Conn.) conglomerate's dividend, he might shore up the company's cash position and prevent a ratings cut. But doing so could prompt individual investors, who own a hefty portion of GE's shares, to give up on the stock for good.
A number of analysts believe that the rating or the dividend—or even both—could get cut this year.
Rating in Danger?
"As 2009 unfolds, we believe GE is likely to face a serious decision: whether to try to sustain its dividend or allow its AAA credit rating to be reduced," wrote Sterne Agee analyst Nick Heymann in a research note. "While neither of these outcomes is a certainty, the probability that one or both could occur during 2009 has increased sharply."
Credit Suisse (CS) analyst Nicole Parent, meanwhile, believes if Immelt is faced with that decision, he'd choose in favor of the dividend. "We believe GE's preference when push comes to shove is to maintain the dividend, even at the expense of the AAA," she wrote in a Jan. 21 research note.
Immelt, so far, isn't making that choice. He reiterated on Jan. 23, as he has done repeatedly in the past, that the company plans to maintain its dividend for 2009. He also reaffirmed his intention to run the company so that it retains the AAA rating.
When asked on CNBC whether, if forced to choose, he'd protect the dividend or the AAA rating, Immelt refused to choose. "I just don't go there," Immelt responded. "It's like, 'Do I believe in revenue growth or cost-cutting?' If I let one of my managers come in and say, 'I've got to do my revenue growth, so I can't cut costs,' I'd throw them out."
The company's net earnings were down 44%, to $3.7 billion, in the fourth quarter of 2008, from $6.7 billion in the same period of 2007. The company also announced full-year earnings of $18.1 billion, down 19% from the year before.
Some of its businesses were strong: Profit for the energy segment rose 27%, and its oil and gas businesses' profit rose 31% for the year. The conglomerate's capital-finance business fell 29%. The company said orders for its infrastructure equipment declined 6% in the fourth quarter, while the backlog of equipment and services was up 9%.
GE did take steps to bolster the cash position on its balance sheet, which grew from $16 billion in the third quarter to $48 billion at yearend. Immelt is also trying to get his managers to focus more closely on cash: At its annual outlook meeting in December, the company noted that 50% of management incentives are now based on delivering cash flow.
With the stock bouncing near its lowest price in years, at least one analyst was left struggling to find the good news for investors. Wrote Morgan Stanley analyst Scott Davis in a Jan. 23 research note: "The biggest investment positive that we can identify on GE stock is that sentiment is already toxic and probably can't get much worse."
McGregor is BusinessWeek's management editor.