GE jumps at bad news
S&P downgraded GE from AAA to AA+ today. Moody’s has not followed suit yet, but likely will soon. The uncertainty surrounding a dividend cut and ratings downgrade have caused investors to flee from GE stock over the last month and brought to lows not seen since 1991. Yet, despite the coming to fruition of a dividend cut (GE will be reducing dividends by 66% from 31 cents to 10 cents in 2H 2009) and now a ratings downgrade, GE’s stock jumped 13% today.
In fact, GE’s stock is up over 30% this week and has rebounded swiftly from its lows. What gives?
It seems that with the uncertainty removed for the time being, investors are finally concentrating on the fact that GE’s core infrastructure business continues to perform and that the financial unit has generally outperformed its peers. While the financial unit’s $515 billion in debt ($220 of which will mature in the next 4 years) and questions over the true valuation of its $660 billion in book assets remain worrisome, it would seem that the outlook on GE’s capital costs and cash flow needs has stabilized.
Yes, dividends will be lower for the time being and maybe for several years as the Company right sizes its leverage, but the dividend investors who care have fled the stock and an annualized 40 cent dividend will provide a more than adequate 4+% dividend for new investors.
The ratings cut which usually increases capital costs will not likely cause any material changes for GE who, as a regular bond issuer, has had to offer debt at a premium to its ratings for years. Furthermore, near term risk of a collateral call in excess of $8 billion due to a ratings downgrade below A+2 are likely minimal particularly given how slowly the ratings agencies seem to move.
All clear to go long GE? Significant risks from further economic deterioration and continued frozen credit markets likely put GE out of the risk tolerance of its previous investor base – income oriented retirees – but I for one have liked and continue to like the risk reward being offered by this super large cap’s stock.
Full disclosure: Author is long shares of GE at the time of writing.
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