With interests in technology, manufacturing, and media, General Electric is highly diversified -- a position that should help prop up earnings in this troubled economic environment. GE has one blemish, however, GE Capital.
GE Capital is the lending unit at the diversified conglomerate, providing consumer and commercial loans. According to GE's latest 10-Q regulatory filing, GE Capital had $422 billion in financing receivables at the end of September 2008. However, the company expects as much as $7.2 billion in credit losses in 2008. Default rates are up as much as 20 percent over the last year on consumer and commercial loans.
Earnings have thinned out so much at the finance unit that Standard & Poor's lowered its outlook for GE to negative from stable. The move puts GE's Triple A credit rating in jeopardy. S&P suggests there is a one in three chance the rating will be lowered in the next couple of years, too.
GE management has vowed to fight for the coveted credit designation. After reporting the September quarter, GE management announced certain strategic moves to strengthen its financial profile. The share repurchase program has been suspended (reduced cash outflow). Dividends from GE Capital to the parent have been reduced to 10 percent of GE Capital earnings from 40 percent (bolsters GE Capital's balance sheet). The company is also shrinking its commercial paper issuance so that the financial services business is a smaller portion of total earnings.
In addition, last month the Federal Deposit Insurance Corporation approved GE Capital's application to participate in the FDIC's debt guarantee program called the Temporary Liquidity Guarantee Program. The FDIC program is an attempt to strengthen confidence in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts and holding companies. As it is likely that the credit crunch could continue to strangle the economy through the first half of 2009, additional access to liquidity could come in handy.
Reporting by contributor Debra Fiakas, who does not hold a financial interest in any stocks mentioned in this article. The 10-Q Detective has a Full Disclosure Policy.