GE cuts quarterly dividend to 10 cents a share

[February 28, 2009]  WASHINGTON (AP) -- For the first time since the Great Depression, General Electric Co. is cutting its quarterly dividend, a move that allows the struggling conglomerate to save $9 billion a year as it braces for a tough 2009.

GE, one of the nation's largest companies, said Friday it will pay shareholders a 10-cents-per-share dividend beginning in the third quarter, 68 percent lower than the company's original plan of 31 cents.

The dividend cut - long predicted by Wall Street - is the company's first since 1938 and follows similar actions by other industrial companies amid the worst financial crisis in seven decades. Dow Chemical Co. announced its first dividend cut in 97 years earlier this month.

In a statement Friday, CEO Jeff Immelt said that GE's board of directors cut the payout to strengthen its balance sheet and provide "additional flexibility." GE is trying to protect its top 'AAA' credit rating despite growing doubts over the stability of its GE Capital lending unit.

"We believe it is the right precautionary action at this time to further strengthen our company for the long-term," Immelt said in the statement.

Shares of the Fairfield, Conn.-based company fell 59 cents, or 6.5 percent, to close at $8.51 Friday. The stock price has plummeted over the past year, trading at its lowest levels since the mid-1990s.

Analysts had questioned GE's ability to pay a generous dividend while it hunted for money to shore up GE Capital. The unit, which makes a wide range of loans, for overseas home mortgages and big energy projects, has suffered during the banking and credit crisis. GE is in the process of restructuring that business by cutting jobs, injecting it with more cash and reducing its dependence on risky debt.

GE Capital was the largest profit driver at the company in recent years, but has suffered mounting losses on growing loan defaults. GE said in January that fourth-quarter profits at GE Capital dropped by two-thirds to $1.03 billion. The company said it set aside $10 billion for GE Capital loan losses, $1 billion more than it had projected just a month earlier.

GE, which has paid dividends every quarter since 1899, said in December that its dividend would cost $13.4 billion out of a projected 2009 cash flow of $16 billion.

The cut was deeper than some investors had predicted, which may have contributed to the fact that GE's stock still dropped after the announcement, said Eric Boyce, a portfolio manager at Hester Capital Management in Austin, Texas.

Boyce, whose firm owns 600,000 GE shares, said it was the right decision, but that it will become part of Immelt's legacy.

"He was the steward of the ship when they made this historic dividend cut after he staunchly defended being able to maintain it," Boyce said. "That is egg on his face in retrospect."

Even as the recession deepened, GE resisted calls to conserve cash by shrinking its payout. Immelt said as recently as January that a cut was not in the works. The company planned to pay $1.24 this year, the same as 2008, although that annual payout was the first in 32 years to be held flat.

Then in January, GE reported a 46-percent drop in fourth quarter earnings and warned 2009 would be tough. In February, Immelt said GE would reevaluate its dividend for the second half of the year, although GE has stuck by plans to pay 31 cents per share for the first two quarters. Earlier this month, GE said Immelt gave up a bonus and nearly $12 million in incentive pay because of GE's poor performance.

To stabilize its finances, GE has taken steps such as raising $15 billion in capital from investors that include Berkshire Hathaway's Warren Buffett. It has also reduced its reliance on riskier commercial paper short term debt and lowered its leverage ratios. GE said Friday that it does not have plans to raise more equity after the dividend cut.

Analysts said those steps should put GE on better footing.

"It made sense to cut the dividend," said Matt Collins, an analyst with Edward Jones. "In this environment, it doesn't make sense to pay out $13 billion a year."

The broad recession is also eating into profits at the company's industrial unit, which makes aircraft engines, home appliances, light bulbs and wind turbines. GE says profits could be flat in its industrial businesses this year.

GE's top-notch 'AAA' credit rating is also under scrutiny because of GE Capital's problems.

Many analysts believe that a ratings cut could come as early as this year, an action that could force GE to pay more to borrow money. Both Moody's Investors Service and Standard & Poor's said in statements Friday that the dividend cut would be a factor as they consider GE's creditworthiness. But both left their top credit ratings unchanged after the news.

[Associated Press; By STEPHEN MANNING]

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