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Analyst: Odds up of GE dividend, rating cut

Shares of General Electric Co. traded lower Monday as an analyst warned that the probability of a credit rating or dividend reduction in 2009 has grown because of trouble in the conglomerate's lending division GE Capital.
/ Source: The Associated Press

Shares of General Electric Co. traded lower Monday as an analyst warned that the probability of a credit rating or dividend reduction in 2009 has grown because of trouble in the conglomerate's lending division GE Capital.

Sterne Agee analyst Nicholas Heymann wrote in an investor note that GE is "living on the fault line" as it tries to sustain its $1.24 dividend this year and its closely guarded 'AAA' credit rating.

Heymann wrote that a reduction of the rating or dividend is not inevitable, but that the probability of one or both occurring has increased sharply this year. He cited factors that include metrics set by Moody's Investors Service to maintain its top rating of GE, rising U.S. unemployment that could hobble GE's credit card lending profits, and falling real estate values in Europe that could impact the company's real estate finance business.

The Fairfield, Conn.-based GE, which makes everything from light bulbs to jet engines, plans to significantly shrink the size of GE Capital because of ongoing turmoil in financial markets.

Chief Executive Jeff Immelt said last month that the company still plans to pay a $1.24 dividend this year and that he saw the 'AAA' credit rating as a philosophy of how GE operates that remains important.

GE spokesman Russell Wilkerson said in an e-mail that the company does not usually comment on analyst reports.

Heymann wrote that a reduction in GE's credit rating would make it difficult for the company to sustain its dividend, since both are indicators of a company's overall health.

However, the analyst said that any changes, including the possibility of placing GE or GE Capital on a credit watch, likely would not occur until after the company reports its first-quarter or second-quarter earnings results. Heymann has a "Sell" rating for GE, but said Monday that he is maintaining his earnings per share forecast of $1.40 next year. That estimate is "highly conditional," he wrote.

The analyst also cut his price target to $13 from $14, which implies downside of 23.8 percent from its closing price Friday.

GE shares fell 44 cents, or 2.6 percent, to $16.63 Monday.