Mel Marcino understands why General Electric Co. decided to cut its quarterly dividend by two-thirds.
“I think they had to do it,” said Marcino, who worked at GE as a machine tool operator from 1973 to 1987, and now owns thousands of shares in the company. “The economy has taken a much bigger hit than anyone suspected. It’s probably not a bad idea to cut the dividend back.” He said he doesn’t have as much to worry about as other GE shareholders, particularly older retirees, who use their dividend payments to cover expenses.
“I’m not retired yet,” said Marcino, president of Empire Cleaning in Saratoga Springs. “I don’t feel the impact severely at this point.”
Earlier this month, GE announced that it would cut its dividend. The move came as a surprise to shareholders, because initially the company said it would maintain the dividend.
Helen Quirini, a longtime labor activist who serves as president of the retiree council for IUE-CWA Local 301, said that the dividend cut is making life more difficult for retirees.
“The dividend cut hit me kind of hard,” Quirini, 89, said. “Many, many people bought shares in GE because of the dividend. I’ve stopped spending money, absolutely.” She said the dividend cut is only part of the situation — “the cream on top of the milk” — and said that she’s more concerned about the declining value of General Electric stock, and the lack of cost-of-living adjustments to the pensions of GE retirees.
“People are angry, and rightfully so,” said Quirini, who lives in Rotterdam. “My needs are not that vast. I drive a second-hand car, and all that. But some of the retirees have told me that they might go back to work.”
Even so, Quirini is still buying General Electric stock. She said she owns about 100 shares. “I’ve bought more GE stock, since the stock is so low,” she said. “The company is going to come back. It’s a solid company.”
Quirini isn’t unusual, according to Lynn Wright Barnes, a financial planner for Wright & Barnes Investments in Schenectady. In the past week, many of her clients have decided to purchase General Electric stock.
Many retirees use their pensions and Social Security to pay their bills, and spend their dividend payments on what Wright Barnes described as “the extras” — entertainment, trips, etc. “That extra money is going to be less,” she said. “People are going to cut back on their local spending. They’ll go out for dinner once a month, instead of twice.” She said people also use their dividend payments to pay taxes.
What has angered shareholders, Wright Barnes said, “is that GE said in November they would keep the dividend for a year, and then they turned around and dropped it.”
Jim Denney, the president of Mohawk Asset Management in Glenville, agreed. “People rely on the dividend for maintaining their standard of living,” he said. “You’ve got folks who have invested in GE for generations.”
Hugh Johnson, chairman and chief investment officer of Johnson-Illington Advisors in Albany, said that he hoped people who own General Electric stock also have diversified portfolios “and don’t depend too much on one company.”
General Electric is going through an unprecedented rough patch.
Last week the ratings agency Standard and Poor’s cut General Electric’s top debt rating from AAA to AA+ — a one notch reduction — over fears of rising loan losses and lower earnings at the company’s lending arm. Standard and Poor’s said that GE’s finance unit, GE Capital, faces higher losses on its loans in areas such as real estate.
Denney viewed the credit rating announcement as positive, because people were expecting the reduction to be more significant. “They were expecting that it might go down two or three [notches],” he said.
Denney said that General Electric has been pretty aggressive, and that for the most part the company has been making good decisions. He said cutting the dividend was a smart move, but that the company should have communicated better with shareholders. In December, GE announced that it would continue the $1.24 dividend in 2009, but by mid-February, GE Chairman and CEO Jeff Immelt said the company would evaluate the dividend’s level for the second half of 2009 “in light of the growing uncertainty in the economy.”
“The dividend is an implied contract between a company and the shareholders,” Denney said. “If you say that you’re going to maintain the dividend, and then you start backtracking, you diminish the credibility of your company. I think they made the right decision, but how they went about it, they violated that contract. Clearly, their stock paid a price.”
In cutting the dividend payment to 10 cents from 31 cents, General Electric expects to save $9 billion annually. The cuts will take place in the second half of this year.
“If General Electric is successful at conserving cash and rebuilding their finances, it will show up in the stock price,” Johnson said. “That’s good news for investors.” The dividend cut “may help GE survive this difficult period, and the stock price will go up.”
GE has raised $48 billion in cash this year. It has also taken part in a federal plan that allows companies to borrow with the backing of the government’s top credit rating.
General Electric shares have rebounded slightly this weekend, closing on Friday at $9.57. On Monday, shares closed at $7.41.
Denney said that General Electric needs additional capital, and has been raising capital, but that capital is expensive. “How can they be out there raising capital that, relatively speaking, is expensive, yet continue to pay an extremely high dividend?” he said. “They had to rationalize their dividend payout ratio.” The dividend cut, Denney said, probably helped GE avoid a greater reduction in its credit rating by Standard and Poor’s.
Denney said the dividend cut will likely be temporary, but that he expects that General Electric will be cautious about raising it. “You don’t want to raise it prematurely, and then have to reduce it,” he said.
“GE’s history is to raise the dividend,” Denney said. “Essentially what they’re doing right now is hitting the reset button. Everyone is resetting to reflect what’s going on in the economy. We’re going through the bust part of the cycle. We’re going to be facing some headwinds, because we’re paying the price for some of the excesses that built up. They took entire generations to build up, and we’re going to wash them out of our system.”
Financial planners estimate there are thousands of General Electric shareholders in the Capital Region. About 15,000 retirees live in the Capital Region.
Marcino said he still has confidence in GE.
“I don’t see GE folding,” he said. “It’s like anything. It’s a cycle. … They have a good business model overall. They’re an extremely diversified company.”
In a prepared statement, GE Chairman and CEO Jeff Immelt said, “We recognize the importance of the dividend to our shareholders and the significance of this decision, but we believe it is the right precautionary action at this time to further strengthen our company for the long-term, while still providing an attractive dividend.”
General Electric did not return a call for comment.
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