General Electric Company (NYSE: GE) investors got even more bad news this week when Moody’s Investors Service lowered its credit outlook for GE to negative, warning that another credit downgrade could be just around the corner.
GE stock tumbled 4.2 percent following the revision, and analysts say a credit downgrade would put GE’s dividend at serious risk of another cut.
Moody’s reiterated GE’s senior unsecured debt rating of A2 but lowered its outlook to negative and said a settlement with the Department of Justice will both adversely impact GE’s capital ratios and increase GE’s borrowing needs.
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“The negative outlook reflects the added headwinds to restoring GE’s credit profile as a result of the $1.5 billion reserve that GE recorded in relation to the investigation by the Department of Justice of possible violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 by WMC, GE Capital’s discontinued mortgage business,” Moody’s said in the report.
Moody’s cut GE’s long-term debt rating from A1 to A2 in November, citing concerns over the company’s energy business. This week Moody’s said GE is at risk of another downgrade if it can’t demonstrate “meaningful improvements” in free cash flow or if its Power business continues to weaken.
Bank of America analyst Andrew Obin says the timing of the Moody’s note could be a bad sign for GE investors.
“The outlook downgrade is somewhat surprising given that the rating agency affirmed the outlook only last week ahead of earnings and could be an indication that the rating agency is ready to take GE’s rating down,” Obin says.
An A3 rating is the lowest level considered to be upper-medium investment-grade.
Not only would another credit downgrade potentially increase GE’s borrowing costs, Obin says it could put GE’s dividend on life support.
[See: 7 of the Best Stocks to Buy for 2018.]
“The Moody’s outlook downgrade likely raises the risk of lower dividend payout, as we think GE’s primary focus is to defend its investment grade credit rating, and dividend cut is a more likely avenue to strengthen the balance sheet through 2020 versus an outright equity raise,” Obin says.
GE stock is down 31 percent since the company cut its dividend by 50 percent in November.
Bank of America has a “neutral” rating and $17 price target for GE stock.
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General Electric Company (GE) Dividend Is on the Chopping Block Again originally appeared on usnews.com
