General Electric (NYSE:GE) CEO Jeff Immelt now says that he's "prepared to run the company as a double-A". That looks like he's climbing down from his comments last month that the company remains committed to maintaining its triple-A rating. Of course, it's not entirely in his hands; as he himself said yesterday: "the ratings agencies ultimately will decide."
The agencies certainly don't think GE's triple-A rating is a lock. In December, Standard & Poor's (a unit of McGraw Hill (NYSE:MHP)) put the odds of GE losing its triple-A rating during the next two years at one in three.
The market has already voted
Parts of the market appear to have already factored in a downgrade. GE's five-year credit default swap (CDS) spread is 4.1%; that's quite a bit higher than that of another AAA corporation, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), which is nearer 3%. (In plain terms, this means that it costs almost $400,000 annually to insure against the risk of default on $10 million of GE bonds over five years.)
Both, in turn, substantially exceed the cost to insure debt of two other triple-A corporations without financial businesses: the CDS spreads for ExxonMobil (NYSE:XOM) and Johnson & Johnson (NYSE:JNJ), for example, are less than 1%.
This isn't just an anomaly of the CDS market, either. According to Moody's (NYSE:MCO), GE bonds have traded at levels that imply a rating that is five rungs below Aaa, at A2, for the last six years.
Without the dividend, you're not looking at much
Speaking of looking back a few years, GE shares have substantially underperformed the S&P 500 over the last 15 years, returning just 4.1% on an annualized basis. Take away the dividend and you're left with a paltry share price return of 1.6%. No wonder Immelt desperately wants to keep the dividend -- without it, shareholders may start to wonder where the return on their capital is going to come from.
That might explain why he's prepping investors for a downgrade in the rating. In reviewing GE's credit rating, one of the factors Moody's is considering is "the stress that the external dividend puts on the industrial cash flow," according to Richard Lane, the Moody's analyst who oversees the company.
And the winner is ...
It looks like Immelt painted himself into a corner in January and has now made a choice: The dividend will take precedence over the triple-A rating. Perhaps the episode will serve as a lesson that it's imprudent to make promises to investors in the worst crisis to hit the U.S. in at least a generation.
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