Dow Chemical Dividend Lesson For GE (DOW, GE, MMM)

Dow Chemical Co. (NYSE: DOW) probably would have had a much better day if the market did not plunge at the end of the day.  In university finance classes they teach you that cutting dividends is a bad move, but that isn’t the case when the yield has gone parabolic and when companies have to go into preservation mode.  This is something that we suspect General Electric Co. (NYSE: GE) will follow soon.

The chemicals giant announced a 64% reduction to its dividend.  The prior payments were $0.42 per quarter.  That $1.68 per year was currently giving a 16% yield.  The new rate is $0.15 per quarter, which comes to $0.60 per year.  Based on a closing price of $10.04, its new yield is right around 6%.  The savings here could reach about $1 billion per year.

Again, we are telling you (and we are really telling G.E.) that their dividend is just way too high for the current market.  3M Co. (NYSE: MMM) recently hiked its dividend, but it was a small hike and its dividend is now close to 4%.

Our call is for G.E. to cut that $1.24 dividend down in half… or even by 40%.  With 10.5 billion shares, GE could save over $1 billion per dime it trims from that dividend.  A billion is not what it used to be, and with a balance sheet this size it may seem like a line-item.  But a few billion here and a few billion there becomes real money after a while.  Particularly when costs in other areas are getting harder and harder to cut.

We think Immelt signaled and hinted at final dividend capitulation when the company recently reaffirmed its Q2 dividend as the comments were for the first half.  This still yields in excess of 10% today.

GE can cut its dividend in half with a promise of returning to a more premium level when the markets and the economy normalize.  At the current rate, this would be a saving of well over $5 billion.  Actually, over $6 billion at the current rate.  The ratings agencies would applaud the lower “capital outflows to common holders” as it would go toward the company’s funding needs.  That is our take anyhow.  Bear markets and preservation perceptions require different theory and different practice than when a boom is in place.

The timing is also everything.  If it is announced on top of other bad news or in the middle of a horrible market day, then it likely won’t get the proper reception.  Dow’s stock would have likely closed higher today if the market was not looking like another down dead day.  Dow did recover to end up flat.

Jon C. Ogg
February 12, 2009