GE Cuts Dividend to .10 a Share; Should I Buy or Sell?
Beginning in the third quarter of 2009, GE plans to cut it’s current quarterly dividend from .34 to .10 a share; 68%! Cutting the dividend will save the bluest of blue chip stocks over $9 billion next year. Shares of the largest builder of jet engines and turbines were down 5% to $8.51 on February 27th. It is almost unbelievable that GE shares are under $10. GE has not traded under $10 a share since September of 1995.
GE Capital, GE’s financial unit is the main cause of the decline and subsequent dividend hike for this company. Many are predicting that Moody’s will drop the current “AAA” credit rating that GE Capital maintains. GE makes everything from washers and dryers to locomotives, but saw it’s financial sector take a huge dive during the credit crisis. The parent company of GE is feeling the pains of the subprime and credit crisis. Exposure to real estate and mortgages could ultimately cause the GE stock to go under $5 a share.
With the dividend being cut and the stock falling over 84% since its bull market high in September of 2000, is now the time to buy or sell? If you are looking to get the type of returns that GE produced through the 1990’s then you are looking at the wrong company. Saddled with GE Capital, this company is going to have to raise money to pay off all the bad financial endeavors that it took during the housing bubble. It will take many years to pay off and eventually get rid of this unit.
If you have been a long time shareholder of GE then it might be worth it to hold on for the short term to regain some of your losses. The stock market has halved itself in 13 short months, so it is unlikely that there is much risk to the downside. That being said, it is also highly likely that you will not see major gains in this stock for many years. If you are looking to make a quick buck, it is advisable to get out of GE stock. If you are looking to hold onto an American icon that has great value right now, then holding onto the GE stock is probably right for you.
If you are not a shareholder of GE, there are many investments out there that would provide a better return. As noted, GE is going to have to find a way to pay off the poor decisions of GE Capital. Like many other American companies, GE got too big and thought it could play the commerical finance game. Sadly, this is the cause of the steady declines. If GE had been adamant about creating consumer appliances and electrical services, they would not be in this hole right now. The argument could be made that they would not have climbed as quickly as they did in the late 1990’s without the financial unit, but if the entire investment disappeared, then what was the point?
Overall, there are many better opportunites out there in the current economic environment. The stock market is trying to put a bottom in at S&P 740 and the overall outlook is extremely pessimistic by analysts. This is a great sign that we could be entering a very strong cyclical bull market. You do not want to miss the gains of a cyclical bull market as stocks often increase over 30% a year during these period.