General Electric (GE) +3.37%
Moody’s Investors Service said it’s evaluating whether to lower the long-term debt rating for GE and GE Capital, a review that takes about 90 days.
GE expects to generate as much as $16 billion in cash this year after capital expenses, which would be more than enough to pay out roughly $13 billion in dividends (at $1.24 per share). Moody’s is examining the sustainability of GE’s cash flow and, more specifically, wants GE Capital to earn enough to restore a larger payment to the parent company in 2010 – GE is expecting $500 million from a reduced payment GE Capital makes to the parent company.
Under GE’s business model, the finance unit gives the parent a percentage of profit that’s redistributed to all of GE’s businesses. In September, GE allowed GE Capital to cut its contribution to 10 percent of the unit’s profit from 40 percent.
CEO Jeff Immelt and GE’s board consider paying the dividend a good way to return value to shareholders. According to Bloomberg, 40 percent of GE’s holders of its 10.5 billion outstanding shares are individual investors. Immelt explained, “It has just been the judgment that this has been the most investor-friendly use of this capital.”
These days it’s not as essential to have the Triple-A to get funding, but it is an important psychological level. (The difference in cost of borrowing prior to the credit crisis was minor from one level to the next; however, that is not the case today amidst credit market turmoil.) While a cut of the dividend and/or rating may create near-term pressure, ultimately removing these overhangs should be good for the stock.
General Dynamics (GD) +7.70%
General Dynamics said fourth-quarter earnings rose 5.7 percent and made a conservative initial forecast for 2009 earnings. The aerospace group posted the largest quarterly gain among the company’s four units, with ships and information technology also rising, while revenue from combat systems declined.
The company acquired Jet Aviation, for $2.2 billion to expand flight-support into Europe, Asia and South America. The added service revenue will help keep the aerospace unit growing amid a global recession that may weaken demand for Gulfstream jets. The Jet Aviation acquisition helped lift quarterly sales at the company’s aerospace unit by 27 percent to $1.53 billion.
For the full year, operating earnings grew significantly faster than revenue and free cash flow from operations totaled 106 percent of net earnings, showing the strong quality of GD’s earnings.
The company’s total backlog grew by $13.6 billion in the fourth quarter to $74.1 billion. For the full year, company-wide operating margins increased by 110 basis points over 2007, to 12.5 percent.
WellPoint (WLP) +4.41%
WellPoint missed estimates for fourth-quarter earnings and will not give a profit forecast until their investor conference on Feb. 24.
Earnings of $0.65 per share were heavily affected by realized investment losses, which totaled $0.69 per share, or $543.2 million. WellPoint recorded a total of $1.1 billion in investment losses for 2008. Another negative was WellPoint’s membership, which has finally begun to feel the effects of rising unemployment.
The company also laid blame on their computers for their mistakes in setting rates too low and keeping elderly customers from receiving drugs – which ultimately led the government to block WellPoint this month from adding Medicare customers.
WellPoint’s medical loss ratio – the percent of premium revenue paid out to health providers – increased to 83.4 percent from 82.9 percent a year ago. Analysts view this percentage as an indicator of future profit. Although the medical cost ratio deteriorated in each quarter of 2008 compared with the prior year, the relative comparisons improved throughout the year. This indicates that the company was successful in raising prices on renewals as the year went on.
AT&T (T) -0.08%
AT&T said fourth-quarter profit fell 24 percent in the fourth quarter, but sales of the heavily subsidized iPhone exceeded expectations. Net income fell to $2.4 billion, or 41 cents a share, as the company recorded costs of 12 cents a share tied to acquisitions and seven cents for workforce reductions.
The company’s legacy businesses – traditional phone lines and advertising from directories – were particularly vulnerable in a weakening economy. The wireless business, however, added nearly 2.1 million net new customers thanks to strong sales of the iPhone.
The company is increasingly reliant on the iPhone for its growth and subsidizes the device to expand its wireless customer base. This quarter, subsidies paid to keep the iPhone 3G priced at $200 weighed on earnings by five cents a share, but AT&T expects the device to be more accretive in 2009 and 2010 as revenue from the more expensive calling plans offset the subsidies.
There is a growing concern among investors that the wireless business, which has been AT&T’s growth engine with years of rapid expansion, may be near saturation. The company wants to move its traditional phone customers to a more expensive bundled service called U-Verse in order to offset slowing wireless and wireline businesses. AT&T plans for U-Verse to reach 30 million homes by 2011.
Despite the prospects of slower future growth, AT&T’s operations continue to generate solid cash flow and its high dividend yield makes the shares a worthwhile investment.
Dover Corporation (DOV) +5.43%
Dover said its fourth-quarter profit dropped 35 percent, but still beat analysts’ expectations as falling demand in most markets offset growth in its energy segment.
Profitability improved in the quarter, with operating margins up 70 basis points over the prior year period and free cash flow made up 13.2 percent of revenue. The company continues to put emphasis on cash flow, which has been used for add-on acquisitions, share repurchases and investment in their businesses. Dover also increased their annual dividend for the 54th consecutive year.
The company reduced six percent of its headcount worldwide and said in the press release: “Further actions have already been taken in the first quarter and we are fully prepared to take additional steps to address any further deterioration in end-market conditions.”
Looking into 2009, Dover sees a continuation of a weak and uncertain global environment. The company expects decreased demand levels across all end markets to have an adverse impact on revenue, but the company is “very focused on protecting margins.”
Boeing (BA) +0.05%
Boeing posted a loss in the year’s final three months after a strike shut factories and faulty parts slowed efforts to restart production.
Boeing faces a potential increase in canceled or deferred orders this year as airlines cope with a drop in travel demand and tight credit. It also must carry development costs on the delayed 787 Dreamliner, which is now due to reach the first customer in early 2010, about two years later than planned.
CEO Jim McNerney said in today’s statement, “The progress we made in many areas of Boeing during 2008 was outweighed by the impact of the strike and our performance on some key development programs.” The Dreamliner delay drew engineers from other programs, causing slowdowns for other models including the 747-8 freighter and intercontinental passenger jet. Boeing said the 747-related expenses cost it $0.61 cents a share.
Boeing plans to deliver 480 to 485 planes this year, less than its July estimate of 500 to 505, and may have to provide $1 billion in financing to customers. Boeing’s order backlog for commercial planes was $279 billion at year-end.
Southern Company (SO) -1.63%
Southern Company, the largest U.S. power generator, said fourth-quarter profit fell 9.1 percent on costs related to leveraged leases on three international energy projects and as the recession curbed use of electricity.
Utility profit fell 9.4 percent as a decline in power demand because of the recession outweighed an increase in rates. The volume of power supplied to industrial customers dropped 10 percent. Southern added about 25,000 new customers from a year ago, about half the growth of previous years.
The company has budgeted $16.4 billion for capital expenditures through 2011, when it expects to begin expanding its Bogtle nuclear plant in Georgia. That’s up from the previous three-year plan of $14.4 billion. Spending on power lines probably will be cut by $200 million in the period because of slower customer growth.
Quick Hits
- FDIC May Run ‘Bad Bank’ in Plan to Purge Toxic Assets
- REITs in U.S. Consider Paying Dividend in Stock to Save Cash
- Robert Rubin Says Mark-to-Market has Done ‘Damage’
Peter Lazaroff, Junior Analyst
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