Published Wed, 11 Jul 2018 11:37:09 -0400 on Seeking Alpha
A Major Issue For GE Is A High Debt To Debt Plus Equity Ratio. Dividends Contribute Disproportionately To That Problem TABLE 1
The high level of debt, as a percentage of debt plus equity, is a major issue for General electric (GE). It affects credit ratings, with flow-on effects to interest rates on borrowings. GE not only requires borrowings for its internal needs, but the ability to borrow at low interest rates advantages its sales of capital products to its customers. TABLE 1, CASE A, shows GE paid dividends of $7.741 billion in FY 2017 and $1.078 billion in the first quarter of 2018.
Debt as a percentage of debt plus equity decreased from 70.6% to 69.2%. CASE B shows, if no dividend had been paid in the first quarter of 2018, debt as a percentage of debt plus equity would have fallen to 68.6%. Similarly, CASE C shows if no dividend had been paid in FY 2017 and first quarter of 2018, and the $8.8 billion cash used instead for debt reduction, debt as a percentage of debt plus equity would have been down to 64.4% at the end of first quarter of 2018.
Quite amazingly, CASE D illustrates, to achieve now, the same 64.4% debt to debt plus equity ratio by means of cash from asset sales, would require sales of $24.74 billion of assets at book value (around 3 times the cash needed to achieve the same effect through debt reduction instead of dividend payments).
That required $24.74 billion is more than the proposed $20 billion of asset sales proposed by GE. Why would... Read more