S&P Revises Outlook on GE Credit Rating

Posted by: Jena McGregor on December 18, 2008

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.”

Reader Comments

steverino

December 18, 2008 7:17 PM

ANALyst's are all idiots

Edward J. Alweis

December 18, 2008 7:56 PM

Who is Scott Davis? And if Morgan Stanley is so astute, why are they in such terrible straits? "Experts" like
these firms is what has gotten us into such a mess.

Matt Lechner

December 18, 2008 8:08 PM

Corporations of all sizes and types must recognize that dividend policy is not something set in stone.

Dividends can be raised or lowered depending on financial conditions and outlook. The key thing with GE at this time is to not start running it like a black box, because that could likely lead to a myriad of problems. It may need to be a little more dynamic than it is. It appeared to do better when it was more dynamic.

Industrial firms actually do not need a AAA rating. AA is absolutely fine.

However, GE is both industrial and financial. For financial firms, the AAA rating is extremely helpful.

For both categories, industrial and financial, the credit trend and stability of the credit rating are of great importance, in addition to the rating level itself.

The question is whether GE is being led or whether it is being administered. This is an issue at many large corporations today, not only GE.

If the firm needs to be restructured, and the rating shifts to AA - it would be better for America to have a GE with a AA rating ready for the future rather than a GE with a AAA rating that is steering by the rear-view mirror.

One would hope senior GE management will continue to offer the analyst and investor constituencies clear and forthright financials, and not retaliate against analysts who ask pointed questions.

At a GE presentation, Jack Welch once said "Skate to where the puck is going." Let's hope GE is actually thinking that way today.

Matt Lechner - CFP, CRPS, CIMA, FRM
Chairman - WSSIG, the Wall Street Special Interest Group

PB

December 18, 2008 9:16 PM

I am sure that S&P is following GE's stock price closely and if it drops some more that will be a signal for them to lower the rating. Simple as that.

Chan, Houston

December 18, 2008 9:54 PM

All these sub-prime loans are rated AAA, what a bunch of crooks. S&P stands for Steal and Preach.

RB

December 19, 2008 1:01 AM

jack welsh did NOT say "skate to where the puck is going."
walter gretzky told wayne that when he was a kid learning the game.
rb.

Firozali A. Mulla

December 19, 2008 1:25 AM

What can SEC do in these times? Bush pondering bankruptcy for carmakers. The Bush administration is looking at "orderly" bankruptcy as a possible way to deal with the ailing US auto industry, the White House said yesterday. Is this really a time to ponder when the auto corporations have already decided to close for the next 4 to 6 weeks because of Christmas and they have no cash?
We have one person thinking now when the cash is going out from all the windows and doors and there is no way to get this back.
I thank you
Firozali A.Mulla

Rick

January 27, 2009 3:48 PM

GE is a dog of a stock. Jeff Immelt is a flawed CEO and the Board is running out of patience and rightfully so. This stock has underperformed ever since he took over for Welch, and will continue to fail to execute on the plan and be embroiled in controversy until he's told to get out.

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