Can you count on GE's dividend?
Investor Daily: The conglomerate's stock is down more than 50%, but the company says the dividend is safe - for now.
NEW YORK (Fortune) -- Is GE's dividend safe? That question is likely on the minds of many shareholders who have watched the value of their GE shares sink more than 50% over past year, mainly over worries about the potential for more losses at the company's financial arm, GE Capital.
The short answer from the company is that the dividend is secure at least through the end of 2009. GE spokesman Gary Sheffer responded to the question by quoting from a company press release sent out in September: "GE also stated that its Board of Directors had approved management's plan to maintain GE's quarterly dividend of $0.31 per share, totaling $1.24 per share annually, through the end of 2009." And on Thursday morning, the company repeated its assurance that it plans to keep its dividend through 2009.
Companies generally only cut their dividends as a last-ditch effort to conserve cash. For example, Citigroup (C, Fortune 500), a longtime dividend-paying stalwart, slashed its payout in January after it took massive writedowns and posted a $9.83 billion loss for the fourth quarter.
GE's situation is not nearly as severe. The oncoming recession will likely hurt the company's manufacturing divisions as global growth and consumer spending both slow. The outlook for media and advertising is getting worse, which is forcing the company's NBC Universal division to slice $500 million from its budget. (Note: the unit was considered a bright spot as recently as mid-October.)
And like most banks, GE's finance unit GE Capital is straining beneath the weight of a prolonged credit contraction and worries about the quality of its assets. Troubles at GE Capital are especially worrisome, since the finance arm has long accounted for the bulk of the company's revenue and growth. On Wednesday, GE announced that GE Capital is eligible for federal backing of up to $139 billion of its debt, which the company says should reassure investors that the unit is on the same footing as competitors with federal backing.
As a result of all that, GE's earnings are expected to fall over the next few years. Goldman Sachs analyst Deane Dray estimated that the company would earn $1.95 a share for 2008, or $19.8 billion. He expects earnings to further drop to $1.75 in 2009, or $18.8 billion. The company earned $2.20, or $22.5 billion, in 2007.
Although there has been one press report that GE (GE, Fortune 500) was considering participating in TARP, Sheffer says the company does not expect that this will happen. It likely wouldn't eliminate the dividend in any case - companies that participate in the TARP plan are not allowed to raise dividends or buy back stock, but they do not have to cut dividends. Neel Kashkari, who is overseeing the TARP plan, said Monday at a conference about the government's asset relief plan that companies participating in TARP should keep their dividends so that they remain attractive to private investors.