Investors pummeled shares of General Electric
What's a AAA rating worth?
In an email to investors, the company denied that it was preparing to raise capital. It's also far from certain that any downgrade would raise GE's borrowing costs. According to credit rating agency Moody's
Still, A2 is uncomfortably close to the Aa3 threshold, below which GE would need to post $8 billion in additional collateral -- an immediate (and painful) economic impact.
In general, I'm no fan of conglomerates, particularly those dependent on a sprawling lending arm for much of their profits. Furthermore, I think it's now likely that GE will lose its AAA rating, and highly unlikely that GE Capital will earn $5 billion this year, as the firm projects.
Lest there be any confusion among investors…
All the same, GE is not a Citigroup
Although GE's shares look undervalued at this stage, trading at less than seven times the lowest analyst estimate of 2009 earnings per share, I'm not comfortable with the breadth and opacity of its financial exposure, nor the range of outcomes in this situation. For that reason, I'd classify GE common shares as a speculation. If you're into gambling, and comfortable with considerable risk, feel free to take a look.
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Fool contributor Alex Dumortier, CFA has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Moody's and Berkshire Hathaway are both Motley Fool Inside Value selections and Motley Fool Stock Advisor recommendations. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.