GE slashes dividend by two-thirds

The conglomerate cuts quarterly payout to 10 cents from 31 cents, a move to save the company $9 billion on an annual basis.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- General Electric said Friday that it plans to cut its dividend by 68%, to 10 cents from 31 cents a quarter, a move the conglomerate says should save it $9 billion a year.

Shares of General Electric, a Dow Jones industrial average component, ended the session down 59 cents, or 6.5%, after the news was announced.

"We recognize the importance of the dividend to our shareholders and the significance of this decision, but we believe it is the right precautionary action at this time to further strengthen our Company for the long-term, while still providing an attractive dividend," GE (GE, Fortune 500) Chairman and CEO Jeff Immelt said in a written statement.

"The revised dividend is competitive and reflects what we believe is an appropriate payout in today's market," Immelt said.

General Electric, famous for its light bulbs, is a sprawling conglomerate that has been suffering in the current economic downturn.

It owns a diverse array of companies from media giant NBC, to power generation equipment makers. The company's capital finance division - GE Capital - faced with a frozen credit market has taken the biggest hit during the recession.

The company has been working to juggle both its dividend and its Triple-A credit rating. The Triple-A credit rating allows the company to borrow at cheaper rates, but it also requires GE to have a significant amount of cash on hand.

Immelt said Friday the company has a strong cash position. "We have made tremendous progress in strengthening GE's balance sheet to ensure that the company is well-capitalized and with access to ample liquidity."

In the company's fourth-quarter report, Immelt said "we run the company to have a Triple-A credit rating." He also said that GE "ended the year with $48 billion in total cash."

But ratings agencies have been reconsidering the company's coveted AAA credit rating.

One analyst said that there was not much of a chance that GE would hold onto its AAA credit rating. The question instead was how quickly and how far it would be downgraded.

"You can't maintain the AAA rating. That is gone," said Nicholas P. Heymann, director of global industrial infrastructure at Sterne, Agee & Leach. "The question is that you are trying to mitigagte the rate and the magnitude with which it is adjusted," he said.

Heymann was surprised by the size and the timing of the dividend cut. "They announced the adjustment to the dividend sooner than most expected and secondly they made it a larger reduction than most were expecting." Heymann said most analysts were expecting the dividend to be cut in half.

Ratings agencies weigh in

Ratings agency Moody's said that General Electric's decision to cut its dividend would not get it out of the hot seat. Moody's will continue to review the company for possible downgrade, according to a statement released Friday.

"The reduction in GE's common dividend will address some of the concerns regarding the stress on GE's cash flow," said Moody's analyst Richard Lane in a written statement. "Nonetheless, Moody's is continuing its review of the ratings for possible downgrade."

On Jan. 27, Moody's placed the long term debt of GE and its financial subsidiary, General Electric Capital Corp., under review for possible downgrade.

Standard & Poor's rating agency, which revised its outlook on GE and GE Capital to "negative" on Dec. 18, said Friday the dividend cut would provide the company with more "discretionary cash flow from industrial operations in 2009 than we previously anticipated."

But Standard & Poor's said global economic conditions could still threaten the conglomerate, especially GE Capital (GECC).

"We still intend to reexamine our credit opinions if, for example, deterioration in global economic conditions and GE's industrial businesses becomes more severe than we currently expect, or if we believe that GECC will fall short of its various earnings and other funding targets in 2009, causing us to reevaluate our stand-alone assessment of GECC," the statement from S&P said.  To top of page

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