Ratings, Stocks, and Credibility
There is a reason I never believe people who judge the health of a company by its credit rating: the evidence isn’t there, and everyone in the market knows it isn’t there.
Here is a prime example: General Electric (GE; the company that Jack eviscerated) has a AAA credit rating. It is also paying a 31 cent per share quarterly dividend.
The stock is trading at $12/share as I type.
That’s a yield of 10.31%, per MarketWatch.
The 30-year Treasury, as I write (presumably the Friday close) is yielding 3.32%.
Rounding off—I doubt anyone would seriously quibble the basis point—we have an allegedly-AAA company whose stock is trading 7.00% above Treasuries. At a time when the average “redemption yield” for investment-grade bonds is 6.47%.
Now, in sane circumstances, people would be saying, “Oh, but that’s because GE will, certainly, cut its dividend. And investors know that.” However, CEO Jeffrey Immelt (the man charged with cleaning up Jack’s mess, who instead compounded his predecessor’s actions) assured investors that the dividend will not be cut, even as he noted that GE expects an “extremely difficult” 2009.
Moody’s has GE on credit watch with “outlook negative,” but they’ve only been there since 13 January 2009. This is a company that is paying about 15% of its net earnings out in dividends. Calling GE “not a growth stock” is like calling Sears anything other than a real-estate play: so bloody obvious that it shouldn’t need to be said.
Yet, for some reason, it needed to be said. And Moody’s is hanging there, ten days into “outlook negative” while the bleeding stock market is screaming “junk bond yield” on the equity.
Don’t get me wrong; GE is probably still investment grade. Their
store credit card business ownership of NBC and affiliates consumer products division defense contracts alone should keep them there. But that’s what we said about GM too.
GM stock, which is the downside risk cited by MarketWatch, is currently yielding 28.5%. If General Electric (GE) were yielding that level with the current dividend, it would be priced around $4.35—about another 64% decline. [As noted in the comments, GM has suspended its dividend and actually yields nothing; the MarketWatch site for some reason reports the yield based on the suspended dividend anyway. -ATB]
If you’re asking me, this points the way to a good piece of the other part of the “equity premium puzzle.” But more on that in a later post.