GE stock rises on dividend promise, restructuring of finance arm GE Capital

Shares of General Electric Co. rose the most since 1980 in New York trades after saying fourth-quarter profit would be in line with analysts' estimates and reassuring investors that steps to bolster the finance arm will help protect the dividend.

The stock gained 14 per cent after repeating plans to keep its annual dividend in 2009 and outlining cost-cutting and funding plans for the GE Capital unit. Fourth-quarter profit will be 50 to 52 cents a share, the low end of the previous forecast, excluding a potential charge of $1 billion to $1.4 billion, the Fairfield, Connecticut-based conglomerate said.

The company's executives laid out a plan to restructure GE Capital during a conference call yesterday. They will implement a credit crunch-adapted funding plan, de-leveraging to a capital ratio of 6-to-1 from a previous 8-to-1, and reducing GE's commercial paper balance.

"GE Capital is an invaluable part of GE's portfolio, and we are fully committed to financial services," GE vice chairman and CFO Keith Sherin said. "We have averaged 15 per cent earnings growth over the last 20 years in these businesses. We are operating in an extremely difficult environment, but we are outperforming our peers and we have strong franchises to build upon for long-term growth. We are a mid-market finance company differentiated by an originate-to-hold approach, product and geographic diversification, deep experience in risk assessment and collateral management, and senior secured positions for many of our receivables.

"We are taking a number of tough, but prudent actions to make GE Capital safer, stronger and more secure during this financial crisis. We are committed to being a Triple-A company," Sherin said. "These actions include a funding plan that reflects the current market, and we are lowering our leverage ratio and commercial paper balance. Our forecast anticipates a challenging loss environment. We are also reorganizing the business to reduce costs and allocate capital more efficiently.''

GE vice chairman and GE Capital CEO and president Michael Neal said, "We have established a framework for GE Capital to earn approximately $5 billion in 2009. From there, we believe the business is positioned to sustain solid, 10 per cent earnings growth in the future.''

"GE Capital is a focused, profitable mid-market finance company with leading market franchises and an increasingly more diversified funding model," Neal said. "We will continue to support our customers and originate profitable new business. With the strategic adjustments we have made, we will reinforce our strong competitive position, enhance our funding model and create greater flexibility."

Concern over GE Capital's health has been growing, especially after its earnings fell by a third in the third quarter, helping to drag down the company's overall quarterly results by 23.2 per cent. This loss was a dramatic reversal of fortune for a one-time company powerhouse that averaged an earnings increase of 15 per cent over the last two decades.

In September, it was announced that the 40 per cent dividend that GE Capital had been paying to GE would be slashed to 10 per cent and the subsidiary's exposure to commercial paper would be reduced to 10-15 per cent of total debt.

The shares closed Tuesday's trading session up by 13.6 per cent, or $2.11, at $17.6. The boost has been a break from doubt; exiting shareholders have knocked 58.6 per cent off the company's value in the last 12 months, despite GE's efforts to assuage investor fears over its exposure to toxic assets and funding abilities.

A recent $12 billion bond issuance and a high-yield $3 billion cash infusion from Warren Buffett's Berkshire Hathaway, along with participation in several government lending programs, has underscored the firm's seemingly desperate need for capital. (See: Warren Buffett invests $3 billion in GE's $15-billion capital raising)