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Once Again, GEs Dividend Is the Focus of Investors

S&P downgrades GE credit rating; Moodys and Fitch warn they may too

Moodys warns it may lower the credit rating of General Electric by more than one notch due to concerns about the industrial giants cash flow. PHOTO: MICHAEL NAGLE/BLOOMBERG NEWS GENERAL ELETRIC CO. GE 0.12% increase; green up pointing triangle has a new leader but he faces a familiar question: Does the company have enough cash? The concern, analysts say, comes from a $23 billion write-down in its biggest businesswhich makes power turbinesand a warning that cash flow is going to be softer than expected. Worries about cash flow have led investors to fear the conglomerate will need to cut its once-reliable dividend yet again. S&P Global Ratings on Tuesday downgraded its long-term credit rating on GE by two notches to BBB-plus, putting the struggling industrial company three notches above junk debt. Both Moodys Investors Service and Fitch Ratings warned they too were preparing to lower the companys credit ratings, with Moodys noting it may lower GE by more than one notch. GE has a sound liquidity position, including cash and operating credit lines, a spokeswoman said. We remain committed to strengthening the balance sheet. Rising RiskInvestors are demanding higher yields to holdGeneral Electric bonds as the company'scredit ratings fall. Before the financial crisis, GE was one of the few nonfinancial companies to hold a coveted AAA rating. After five decades, it lost that designation in 2009 amid troubles in its GE Capital financial services business. Before the latest downgrade, S&Ps rating on GE was single A. GE named Larry Culp as CEO on Monday, replacing John Flannery after just 14 months and less than a year since Mr. Flannery cut the dividend payout in half to 48 cents a year. Mr. Flannery revealed that GE hadnt produced enough annual cash flow to pay its dividend for years. But even the reduced dividend payout of $4.2 billion may need to be cut or eliminated, analysts say. I think that will come from going to the dividend first, said UBS analyst Steven Winoker, who also expects Mr. Culp to accelerate the sale of GEs majority stake in Baker Hughes to raise cash. Mr. Winoker also expects GE to move quickly to address any questions about the companys cash holdings. The GE spokeswoman said no decision has been made on the dividend and the board will continue to evaluate it. The company had already planned to reduce the payout by adjusting it after spinning off its health-care business, a move that isnt expected until after this year. Yields of GE bonds rose as prices fell and investors demanded higher compensation for holding debt from the conglomerate. The yield on the firms 30-year bond jumped almost half a percentage-point, hitting an intraday high of 6.3%, according to data from MarketAxess. GEs debt represents about 1% of a widely followed investment-grade corporate bond index and $534 million of the bonds traded after the ratings actions, more than any other companys debt.

GE has been trading like a low-triple-B company for quite a long time, said Tom Murphy, head of investment-grade credit at Columbia Threadneedle Investments, which manages about $25 billions of investment-grade corporate bonds. Columbia has an overweight position in the debt compared with its benchmark index, he said. GEs most-traded bond due 2035 traded at a yield of almost 5%, up from about 3.8% at the start of the year, according to MarketAxess. Comparable bonds of single-A rated Honeywell International Inc. are currently yielding about 4.1%. Before Mondays profit and cash-flow warning, the three major credit ratings firms had negative outlooks on GE. Although the credit agencies said in June they welcomed the companys breakup plan and promise to reduce debt, they also warned ratings could be downgraded if GEs cash flows and earnings deteriorated. On Tuesday, Moodys cited the loss of free cash flowstemming from the troubled power unit and planned divestituresin putting the companys long- and short-term credit ratings under review for a downgrade. Moodys has a long-term issuer rating on GE of A2, the third-highest rung, and a short-term rating of P-1, the highest rating for such borrowing. Fitch said it was putting GEs ratings under review for a possible one-notch downgrade. The firm, which downgraded GE one notch earlier this year, said it originally expected the companys 2018 free cash flow after dividends would be about $2 billion. However, this level, which Fitch already viewed as weak, is likely to be materially lower as a result of the worsening trend at GE Power, the rating firm said.GE had about $13.8 billion in cash at the end of June and had projected it would end the year with more than $15 billion. It had forecast about $6 billion in cash flow for the year, but said Monday it would fall short of that estimate. It plans to provide more information when it reports third-quarter earnings later this month.