General Electric (GE) -10.76%
The best thing about GE’s earnings release is that it contained no surprises, which I thought would be enough to keep shares from dropping further. However, concerns that GE cannot maintain both its Triple-A credit rating and its $1.24 per share dividend payment continues to weigh on sentiment.
The industrial operations showed signs of resilience in the face of a very weak economic environment. The big performance driver continues to be the energy segment, which recorded double-digit growth. Any stimulus package that includes renewable-energy tax credits and production tax credits will continue to drive growth in this segment. Infrastructure orders fell six percent, but backlog rose nine percent. GE said it ended the year with $172 billion of infrastructure equipment and service backlogs.
GE Capital turned in $383 million in profits, but when tax benefits are excluded, the unit lost $1.5 billion. The bulk of this loss is attributable to a $3.1 billion increase in loan loss provisions for financing receivables. The provisions were adjusted higher because of GE’s anticipation of rising delinquencies in the commercial consumer portfolios as higher unemployment levels could hinder consumers’ ability to repay debt.
GE has taken considerable moves to bolster there balance sheet. GE’s cash balance tripled to $48 billion last year, and they have an untapped revolving credit facility of $65 billion. Commercial paper outstanding came in at $72 billion at the end of December, down $16 billion in the quarter, and the company is targeting a cut to $50 billion by the end of 2009. Improvement in GE’s debt should help alleviate concerns regarding the company’s coveted Triple-A credit rating.
GE stressed that their “better safe than sorry” approach is meant to insulate the firm from the uncertainty in the broader financial markets. By making the business model more conservative, the firm has positioned itself to perform well over the long term.
CEO Jeff Immelt restated GE’s commitment to the dividend: “The first quarter dividend is done, and we are committed to our plan for $1.24 per share for the year…We believe the GE dividend provides our investors with a solid return in this uncertain time.” You have to admit, GE certainly deserves some measure of credit for elevating shareholder interest above an agenda growing the business at any costs (see Bank of America, Citigroup, etc).
Looking forward, the company expects 2009 to be “extremely difficult,” but the company has strengthened its cash flow position and taken steps to cut costs. Immelt said the company is position to “return to double-digit growth in a post-recession economy.”
So, are the concerns regarding GE’s dividend and credit rating legitimate or has the company been oversold?
These concerns are legitimate in that one of the two may be cut. The company’s projections for $5 billion profit at GE Capital and five percent earnings growth at the largest industrial and media units are aggressive, and these expectations rely heavily on the economy picking up in the second half of 2009. If these expectations are not met and the current economic conditions persist into 2010, then GE’s dividend or credit rating will likely need to be sacrificed.
However, GE still looks extremely attractive considering their growth potential. The loss of the credit rating or dividend payment would not cripple the company’s prospects for solid post-recession growth.
If the dividend is cut by half, for example, the shares would still be yielding over five percent. This would, in turn, keep their credit rating intact and keep borrowing costs lower than their competitors. Even more, the company could use the additional funds no longer being paid out in dividends to invest in their business for future growth.
If GE instead lost their Triple-A rating, it would lead to greater borrowing costs and put a dent in profitability. In this scenario, GE would maintain their dividend payout, which gives investors a nice return in this difficult market. Standard & Poor’s cut GE’s outlook on Dec. 18, giving the company a one-in-three chance of losing its top rating over the next two years.
Pfizer (PFE) +1.39%
Multiple reports surfaced today that Pfizer is in talks to buy Wyeth (WYE) in a deal speculated to be worth over $60 billion. Some have identified Wyeth as a likely target for Pfizer because of their established foothold in biotechnology, steady consumer-health unit and large cash position.
Pfizer has used big acquisitions in the past as platform for growth, and their reliance on big takeovers over strong in-house research and smart licensing has destroyed an enormous amount of shareholder wealth.
Neither company needs to complete the deal immediately and negotiations could drag on throughout the year. Given the very challenging capital markets, Pfizer’s limited access to major financing may also delay a merger. In the event of a stock deal, the relative cheapness of Pfizer’s equity may prove to be destructive to the value of a merger, and thus lead shareholders to disapprove of the action.
Pfizer has long been expected to make a big acquisition, and it is likely that we will see much more consolidation in the pharmaceutical industry in 2009.
Quick Hits
- Companies Slash Dividends at Fastest Rate in 53 Years
- Citigroup, Bank of America ‘Nationalized’ as U.S. Call Shots
- Bank of America-Merrill Lynch: A $50 Billion Deal From Hell
Peter Lazaroff, Junior Analyst
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