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General Electric (GE) made clear Friday that it has no plans to cut its dividend, but some argue it is only a matter of time before it must act.
Sterne Agee analyst Nick Heymann wrote in an email that the earnings GE reported Friday in several of its business are unsustainable, and he says loss reserves are significantly lower than they were in 2002 and 2003, as the company faced a much weaker economy.
Heymann believes operating earnings in GE's industrial business will be only $8.5 billion to $9.5 billion, not enough to cover the $13.5 billion dividend. He says GE has had to issue debt in recent years to pay the dividend, but that this is unsustainable over time. Further, he argues that GE likely will need to increasingly lean on the government for financial support, making the dividend politically unfeasible as legislators have expressed anger about how companies are using government cash.GE most likely would have to cut its dividend "no later than the second quarter of 2009," Heymann wrote. He set a price target of $12 "with $8 to $10 if and when [the] dividend [is] most likely cut." While GE has not taken any equity from the government and insists it won't do so, it already relies on the government to guarantee its short-term debt, and for other types of support.
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