Arthur J. Villasanta – Fourth Estate Contributor
Boston, MA, United States (4E) – Already battling to stay alive, General Electric Company saw its fight to survive take a big hit with Moody’s Investors Service yesterday downgrading the long-term ratings of General Electric and GE Capital to Baa1 from A2.
“The downgrade reflects Moody’s view that the adverse impact on GE’s cash flows from the deteriorating performance of the Power business will be considerable and could last some time,” said Moody’s.
“The weaker than expected performance at Power is not only attributable to a considerable drop in market demand and ensuing heightened competition, but also to GE’s misjudgment of financial prospects and operational missteps.”
The credit downgrade will put more pressure on new CEO Larry Culp to repair GE’s Power division. Culp’s job got a lot tougher after GE recorded an impairment charge of $22 billion related to GE Power in the third quarter. The U.S. Department of Justice also is investigating the charge.
On Tuesday, GE slashed its dividend to a penny after its stock price hit its lowest level in a nearly decade, briefly sinking below $10. Shares of GE fell 0.9% to $10.09. The stock moved higher earlier in the day following a bullish commentary from UBS AG that upgraded GE to Buy from Neutral.
Analysts said that while the dividend cut was a necessary decision for the company, many of its investors will pay the price. There’s a very large percentage of shares owned by retired employees and individuals that rely on those dividends.
GE’s decision to cut the dividend to a penny signals its objective to prioritize financial flexibility and strengthening its balance sheet. This won’t help much as Moody’s expects “GE’s free cash flow (after dividends) will likely be very weak in 2018, even with good performance at GE Aviation and GE Healthcare.”
GE has a sound liquidity position, including cash and operating credit lines, said a GE spokesperson. “The downgrade is manageable and we are prepared for it. We remain committed to strengthening the balance sheet including deleveraging and will continue to target a sustainable credit rating in the A range.”
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