GE Brings Bad Things To Life

2/16/2009


  Recent Price
$12
  Dividend
$1.24
  Yield

10.7%

  P/E Ratio
6
  Shares (millions)
10,466
  Long-Term Debt as % of Capital
73%
  52-Week Price Range
$38.52 - $10.66

General Electric ($12; GE) still has a respected name, but an illustrious history is no protection against a historic downturn. GE shares, down 65% over the last year versus a 38% slide by the S&P 500 Index, have retreated to their lowest point since 1996.

GE is the sole survivor of the original 12 members of the Dow Jones Industrial Average in 1896. The dividend has risen every year for more than three decades, but the company may have to cut the payout this year.

We don’t recommend buying GE. However, the bellwether has 10.47 billion shares outstanding and may be the most widely held company in the world. The shares look cheap at six times trailing earnings, about 62% below the three-year average valuation. And some business units have plenty of long-term potential. But outweighing those positives are uncertainty over the dividend and credit rating, as well as mounting losses at the finance unit. GE has underperformed the S&P 500 in each of the last four calendar years, and we are not confident that trend will end in 2009. A time will come to invest in Neutral-rated General Electric — but not yet.

Financial fallout
The Capital Finance segment accounted for 37% of General Electric’s revenue and 33% of profits last year. The unit has run into trouble with bad loans and risky investments. GE expects $10 billion in credit losses this year, 11% more than it had projected in early December.

GE Capital threatens its parent’s status as one of just six companies to hold the highest credit rating, triple-A, from either Standard and Poor’s or Moody’s Investors Services. Both agencies warned that GE could face a downgrade, which could make borrowing more expensive. GE has cut back on short-term debt and bolstered its deposit base but remains financially shackled to its dividend.

GE’s dividend totals about $3.10 billion per quarter. Credit-rating agency Moody’s Investors Services fears GE’s operating cash flow could fall below $16 billion in 2009. At current levels, the dividend would consume more than 75% of that cash flow. In the last 10 years, the dividend has never accounted for more than 36% of cash flow. While other firms have had to choose between their credit rating and their dividend, until recently GE maintained it wouldn’t need to choose.

CEO Jeffrey Immelt said in January, “I frequently get the question — what do you favor more, the AAA or the dividend? And I always give the answer, ‘Both.’ ” But in early February, GE showed signs of reaching its squeal point. The company said it would pay a quarterly dividend in April but “evaluate” future payments.

GE’s cash holdings rose 47% to $89.6 billion 2008, but don’t get too excited about the gains. Expenses rose 12% for the year while operating cash flow declined 18%. The new cash came from a $25 billion increase in customer deposits, a $12.2 billion stock offering, and a modest increase in borrowing.

Conclusion
A tough year lies ahead, as consensus estimates project 2009 per-share earnings will fall 35% on 6% lower revenue. While the finance unit will continue to drag on results, many of the industrial businesses are also having trouble generating growth. An annual report for General Electric Co. is available at 3135 Easton Turnpike, Fairfield, CT 06431; (203) 373-2211; www.ge.com.


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