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Just two days after General Electric Chairman and CEO Jeffrey Immelt reiterated the company’s commitment to maintaining its AAA credit rating, Standard & Poor’s revised its outlook on the rating from stable to negative. The move is not a downgrade—Standard & Poor’s reaffirmed the AAA rating—but it does means there is now a one-in-three chance the company could lose that signal of high creditworthiness within the next two years. GE shares fell some 8% for the day.
The rating is of huge importance to the Fairfield, Conn.-based conglomerate, as it allows its GE Capital unit to borrow funds at lower costs than competitors. “The AAA is a philosophy of how you run the company,” Immelt said on Dec. 16 in the outlook meeting. “We’ve put $5 billion into making sure that the leverage comes down. And if we need to do more, we’ll do more in that context as time goes on because I think the AAA’s important.” In recent months, in an effort to defend the rating, GE has stopped buying back shares, raised $15 billion in capital from Warren Buffett and a common stock offering, and maintained its dividend for 2009, the first time it hasn’t raised the dividend in some 30 years. In a statement, GE noted that S&P said it expects the company to execute on its 2009 plan and that it “has managed through difficult economic cycles in the past and we will do so again.”
Still, analysts seem mixed on which is more important for GE to focus on—its hefty dividend that many retail investors rely on or the top credit rating. Credit Suisse analyst Nicole Parent wrote in a research report that Immelt seemed to de-emphasize the AAA rating in the outlook meeting, a move that “makes a lot of sense” given that GE Capital will make up less than 40% of earnings next year, “something it appears GE is finally coming to terms with.”
But Morgan Stanley’s Scott Davis sees things differently. Even if GE can sustain its dividend, he argued in a research note, it may be doing so at the cost of future acquisitions and investments in growth, precisely at the moment when targets are on sale. “Some would argue that the high dividend is supporting GE’s stock,” Davis wrote. “We would argue just the opposite. Indeed, we strongly believe losing the AAA to sustain the short-term dividend would be a big, long-term mistake.”
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