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GE pays big price to keep appearances
By giving notice on Monday that it would issue an unscheduled "update", GE spooked analysts, who slashed earnings forecasts before even hearing what it had to say. Its shares slumped nearly 10 per cent. In the end, the presentation reassured investors about GE Capital's ability to maintain a top credit rating while reinforcing the parent's commitment to the dividend. Earnings guidance was lowered but met expectations.
- Financial Times
- Published: 23:16 December 3, 2008
By giving notice on Monday that it would issue an unscheduled "update", GE spooked analysts, who slashed earnings forecasts before even hearing what it had to say. Its shares slumped nearly 10 per cent. In the end, the presentation reassured investors about GE Capital's ability to maintain a top credit rating while reinforcing the parent's commitment to the dividend. Earnings guidance was lowered but met expectations.
Investors exhaled, ratings agencies approved and the stock surged. End of story?
Not quite. One big question is how GE Capital is financing itself even as it shrinks. While making use of cheaper state funding sources, like the Fed-backed commercial paper programme, and eschewing expensive ones, like the troubled asset relief programme, it is still paying to keep up appearances. The parent company is conserving about $12 billion (Dh44 billion) of cash by halting buy-backs but could rake in another $13 billion by axing the dividend - certainly a cheaper option than paying Berkshire Hathaway an effective 13 per cent for capital, excluding warrants, and issuing expensive common equity for a total of $15 billion in October.
Another question mark is the composition of future earnings, after shelving its 50/50 split between industrial and financial operations. With GE Capital shrinking to an estimated 30 per cent next year, its other businesses will have to shine. Tough to do, although aggressive vendor financing may help it smooth the bumps and win market share.
GE overextended itself during the boom, like everyone else, but investors can be reassured by its solidity and attractive valuation. Still, they should at least be more forceful in pushing management to consider breaking some taboos. Maintaining dividends and the triple A rating are so sacrosanct that all else is secondary. How about emulating GE's recent saviour, Warren Buffett, ever fearful when others are greedy and greedy when others are fearful?
Clearly they are not listening in Nagoya. One day after Taro Aso, Japan's prime minister, called on the nation's business chiefs to raise wages (subtext: forget shareholders, your country needs you), Toyota Motor chopped winter bonuses. The automaker, based in Japan's third biggest city, is clipping 10 per cent off 8,700 managers' bonuses.
Aso had better get used to his plea falling on deaf ears. With the country in recession, exports plummeting and profits tanking - overall, Japan's 1,500 or so biggest quoted companies saw recurring profits slide 26 per cent year on year in the first half - more trimming of payrolls is inevitable. Manufacturers, who employ almost one-fifth of the workforce, are particularly badly hit.
Car makers hurting
Dwindling exports and a strong yen are battering confidence and forcing managements to curb expenditure. Toyota, one of the world's most efficient automakers, is a good illustration.
Top-line growth is reversing. Overall car sales in Japan and South Korea plunged almost 30 per cent last month and sales in the US are likely to have fallen by a similar amount. Toyota reckons its full-year operating profits will be 75 per cent lower than last year.
It is possible, just, that the impact of smaller pay cheques on consumption will be muted. Japanese households, unlike their American counterparts, still have some space to chop back savings to make purchases. Japan's ratio of savings to disposable income has trended down to just over 3 per cent from around 15 per cent in 1991, in part because its ageing population is spending in retirement.
In theory, it could drop further. Economists, however, anticipate a pick-up in the savings rate this year. Domestic consumption is already soft, partly because households saw the writing on the wall long before their politicians did. Mr Aso is right to be concerned about lower wages. But he is probably deluded in thinking he can rally Japan Inc to the cause., that the impact of smaller pay cheques on consumption will be muted. Japanese households still have some space to chop back savings to make purchases.
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