Why is General Electric paying a dividend of 10%?

General Electric released its earnings report, posting net income in line with analyst estimates. And the world had a big sigh of relief. In posting its earnings, GE CEO Jeffrey Immelt defended his company’s dividend and AAA rating.

Immelt told investors Dec. 16 GE can sustain both the AAA and dividend in part because the finance business may have as much as $5 billion in profit this year and GE may generate as much as $16 billion in cash after capital expenses, mainly from the sale of industrial goods like jet engines and power turbines. That would be more than enough to pay the $13.4 billion dividend.

GE today repeated the December forecast for non-finance divisions collectively to have a profit gain in 2009 of no more than 5 percent, while GE Capital will decline to about $5 billion in profit. GE announced last month it would cease making per- share profit forecasts this year.

‘Got the Cash’

“I hate the fact that there’s so much speculation around the dividend and AAA,” Immelt said in an interview today on the company-owned CNBC television network. “I wish my words could end the speculation. The facts of what we’ve done here, I think, should let investors know that we’ve got the cash, and we’ve got the operating model that’s going to secure the dividend in this environment.”

GE had $48 billion of cash on its balance sheet at the end of 2008, compared with $16 billion at the end of the third quarter, the company said. General Electric used $5.5 billion of its $15 billion stock sale in October to bolster GE Capital’s balance sheet, reducing the leverage ratio to 7-to-1.

But, wait a minute; General Electric pays $1.24 a year on its dividend. In pre-market trading GE is down at $12.71. That comes out to a dividend of nearly 10%. Why is this company paying 10% in dividends when 10-year treasury bonds yield 3.5%? Yes, I understand that GE doesn’t want to send a negative signal to the market, but does Jeffrey Immelt really think the stock of GE will rise, say, 100% to cut that dividend to 5%?

I see this as the height of folly. The company is in trouble, trading at its lowest level in 13 years. Immelt is in denial and needs to recognize that paying out this much money in dividends is not appropriate for GE’s new earnings outlook. Paying out $13.4 billion a year in dividends is not sustainable.  In fact, as a commentator in the video below notes, GE’s AAA rating and the dividend are mutually exclusive.  The company will lose its rating if it continues to pay out almost 10%, as much on its common stock as it gives Warren Buffett for his preferreds.

Source
GE Profit Drops 43% as Immelt Backs Dividend, AAA – Bloomberg.com