General Electric’s board of directors today announced it is slashing the company’s quarterly dividend by 68%, to 10 cents from 31 cents per share, starting in the second half of 2009.
The move is a sign of the mounting pressures on the Fairfield, Conn.-based giant to conserve cash amidst a deepening recession. While not unexpected—the board had said it would evaluate the dividend in the second half—it is still notable. Its decision marks the first dividend cut in more than 30 years for the storied conglomerate.
For months, Chairman and CEO Jeffrey R. Immelt has promised to manage the company both to preserve its dividend, a handsome yield for the company’s widely held stock, and to maintain its AAA credit rating, which gives it lower borrowing costs for its GE Capital unit.
But as concerns rose over funding at GE Capital, it became clear he could not do both. The ratings agencies sounded warnings, with Standard & Poor’s revising its outlook on the AAA rating to negative in December and Moody’s saying it was reviewing its rating, which could lead to a downgrade, in late January. On Feb. 6, Immelt said in a statement that the board would “continue to evaluate the Company’s dividend level for the second half of 2009 in light of the growing uncertainty in the economy.”
Investors seemed split on the news. The stock rose sharply following the announcement, but then quickly began to fall again, and was down more than 5% in afternoon trading. Standard & Poor’s equity analyst Richard Tortoriello wrote in a research note that “we have been expecting a reduction and view it favorably, since it will provide the company with flexibility in meeting capital needs at GE Capital, where delinquencies have been rising sharply.”
Meanwhile, the dividend cut does not erase concerns over the AAA rating. Following the move, Standard & Poor’s also issued a statement saying that while “substantial dividend reduction should support somewhat greater discretionary cash flow from industrial operations,” it was leaving the negative outlook unchanged.
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