GE Forced Again To Deal With AAA Rating (GE)

General Electric Co. (NYSE: GE) saw its stock plunge after the close of trading after its corporate credit rating was put on review for a downgrade by Moody’s.  That means that its beloved "AAA" rating is now at risk. If you have read our reviews and read other analyst reports, this action will come as no surprise.  S&P gave it a "negative" review just in December.  We viewed that as the first shot across the bow from the ratings agencies.

Moody’s says that this review for a downgrade is based "primarily" onan increased uncertainty over GE Capital’s asset quality and thecompany’s earnings performance ahead.  The review is also going tofocus on the industrial cash flow in 2009 and 2010 and its ability tofund its high dividend.  The economy is taking its toll, andMoody’s sees soft conditions across GE’s entire portfolio.

Moody’s feels that the company might not be able to adequately fundthat dividend from operations alone.  Analyst Richard Lane even noted,"Incremental borrowing or reduction of existing liquidity levels tomeet the dividend would be uncharacteristic for a firm with a Aaarating."

It also looks like GE had a response on hand in case this happened.The conglomerate issued a statement noting that this is a follow-up callto Moody’s review of GE’s 2009 operating plan.  GE also plans to work constructively with the agency.

But….. Here is where this gets very interesting.  GE says in a statement, "Our objective is to maintain our Triple-A rating but we do notanticipate any major operational impacts should that change. We expectto deliver on the 2009 financial framework that we outlined last week."

The company outlined the steps its already taken that have strengthened itsliquidity.  It reduced GECS commercial paper to $65 billion from $88billion just a quarter ago.  It has also raised 64% of its long-termfunding needs for 2009 and has more than $50 billion in cash on hand.  Italso noted that it increased its alternative funding by $25 billion andwill continue to grow this funding in 2009 and beyond.

Our take on this is very easy.  GE may be able to maintain that"tripe-A" rating.  S&P gave it a one-in-three chance of losing the Triple-A.  This increases the odds that thecompany will lose that status.  But the company can do one quick easytask to prevent this from happening. That’s cutting the dividend.

GE’s dividend yield last week was close to 10%.  Jeff Immelt defendedthat Triple-A status and the dividend on the last earnings call. His statements were weaker in defendingthe dividend rate than just a month or so ago.  Watch our CNBC video from our live CNBC appearance last week to see how that differs from the past.

GE can issue a statement that it wants to maintain its financialstrength, even if it means less shareholder friendly initiatives.  Thecompany already found out that buybacks in a bear market do little tonothing to boost the share price.  If GE cuts 40% of that dividend, it will still yield between5% and 6%.  That would free up $5 billion annually incapital.

Our own more formal take is this: GE IS GOING TO CUT ITS DIVIDEND.  And wethink the stock will rally on this.  That may be counterintuitive,but right now the game is all about safe balance sheets and an abilityto weather the storm rather than paying out too highof a yield to shareholders.

We’d even expect existing shareholders to use a dividend cutannouncement as an excuse to average down on their share prices ratherthan as a reason to sell.

Stay tuned. 

Jon C. Ogg
January 27, 2009