For General Electric, the manner in which it has been delivering dividends throughout its 119 tear old history has made the once dependable company proud.
However that reliability has now dwindled for GE. But now the new boss of the company Larry Culp could be forced to cut the dividend because of the financial condition of the company which has been impacted by high debt and lowering earnings.
Experts on Wall Street seem to apparently agree opn one thing about GE and that is cutting down of dividend.
“Everyone we speak to expects a huge dividend cut,” Barclays analyst Julian Mitchell wrote to clients this week following discussions about the company with over 70 financial institutions.
The Barclays analyst believes that GE will cut dividend by 80 per cent even though Mitchell was bullish about GE. “It could be higher,” he wrote.
The retirees of the company and the large base of mom-and-pop shareholders were dealt a strong blow last November when GE halved its dividend. It should be mentioned that the only two occasions that GE had cut its dividend was during the Great Depression and during the 2008-09 global financial crisis.
It is rare for companies to cut dividend currently. Dividends are being handed over to investors much easily by corporate America because of high cash reserves and large tax cuts.
According to Howard Silverblatt of S&P Dow Jones Indices, so far this year, dividend has been increased by at least 291 S&P 500 companies. Silverblatt said that dividend has been cut by only two S&P 500 companies.
For GE, the problem is that it would cost the company $4.2 billion a year even with the reduced dividend. That amount is consuming eating up most of its projected cash flow – which in turn has been negatively impacted by a drop in its revenues from the power business of the company as well as its financial business.
GE’s credit rating was downgraded by S&P Global Ratings earlier this month and the dividend was identified as the major method that the company would use to reduce debt by the ratings agency.
And in case the company moves on with its plans of spinning off its health care business which is in profits, the earnings of the company would be forced to take a further hit.
“GE needs the money,” said John Inch, an analyst at Gordon Haskett Research Advisors. “A lot of people actually want the dividend cut because it’s apparent the company has a serious cash issue on its hands.”
But there can be a large chunk of GE shareholders who could leave the company if there is a dividend cut further because dividend is the only reason they still own the stocks. According to the estimates of JPMorgan Chase analyst C. Stephen Tusa, about 60 per cent of the shares of GE is owned by retail and passive money. Tusa also predicts that GE will be forced to cut its dividend.
“Many GE employees and retirees own the stock, which makes it especially painful. I have sympathy for them,” said Martin Sankey, managing director of global equity research at Neuberger Berman.
(Adapted form, Money.CNN.com)