Why Investors Are So Worried About General Electric by Gregory Hilton–
One of the hottest topics on Wall Street right now is the future of the world’s most successful conglomerate, General Electric. It has the fourth most recognized global brand name, worth almost $49 billion. It is one of my favorite companies because it’s holding are a broad reflection of both the U.S. and world economy.
The current debate is best illustrated in two messages I received in the past few days. One friend wrote “I see a 60%+ return between now and the end of the year if you buy today. We all know the bad points, but GE will be fine. This is a rare buying opportunity which comes around only once every 10 or 20 years.”
Another colleague continues to be pessimistic, and is hoping there will be a divorce from GE Capital. He concluded his e-mail with “If G.E. is in serious trouble, God help us all. We are talking about more than 323,000 jobs if GE fails. If GE goes than expect a 3500 Dow before the end of the year.”
General Electric is one of six companies in the S&P 500 with a triple-A credit rating. GE shareholder value was destroyed this past year when the stock fell 80%, which is far worse than the broader market which is down 46.4%. The stock is now at a 17-year low, trading below $8 a share. GE was at $60 in the late 1990s, and it was at $33 in the summer of 2008. GE has fallen by 3- 8 percent almost everyday for the past several weeks.
The company has been paying a regular dividend for more than 100 years but this was reversed last week when GE slashed its quarterly dividend by nearly 68% in a move to save its investment-grade credit rating. Reducing its dividend to 10 cents a share from 31 cents will save the company $9 billion annually.
1) The company had $18 billion in profit last year, and it is sitting on $45 billion in cash.
2) Several Wall Street experts are still betting on GE. Warren Buffet just entrusted them with $3 billion. He is not known for throwing money down the drain.
3) If you’re investing for anything beyond 12 months, this could be an excellent buy.
1) If any agency downgrades the credit rating on GE Capital four notches from its current AAA credit rating below AA- , they would be forced to pay out more than $8 billion immediately.
2) Primarily because of GE Capital the company is now carrying more than $500 billion in debt. It is this debt load which is crushing GE shareholders today. Investors fear GE Capital’s reserves for losses are too low in comparison with the top U.S. banks.
3) The stock will continue to be under pressure because dividend-oriented mutual funds might be selling their holdings on the heels of the recent cut.
I do not believe GE is going to vanish but that AAA rating is questionable. The turmoil at GE is very similar to what we saw at Bear Stearns, Lehman Brothers, A.I.G., Merrill Lynch, Citi, and Morgan Stanley.
In the interest of full disclosure, the guy who is so optimistic about GE also said Citigroup would weather the storm, AIG was too big to fail and Lehman Brothers would never fall. I hope the GE cheerleading is accurate but the stock has dropped from $13 to a little over $7 in 60 days. GE at $7.00 is bargain that can’t be ignored but so was Citigroup, AIG, Fannie Mae, Hartford Financial, DryShips and on and on.