Dividends and GE to freeze and prepay pensions to save up to $ 8 billion, cut debt

If you asked most people about a company they knew and respected GE would have come to the forefront very quickly. GE the company that brings things to life. Prior to the 2008 financial meltdown, GE was one of the largest financials services companies in the world, then it fell apart and the massive amounts of profits went away. Since then GE has been struggling to reinvent itself in the manufacturing businesses.

In an article by Alwyn Scott and Ankit Ajmera of Reuters GE was going to freeze pensions for 20,000 salaried workers to take measures to reduce its retirement fund deficit by $8 billion.

CEO Larry Culp is trying to raise cash and pare down $105.8 billion in debt, when he is done GE will focus on power plants, jet engines and windmills, plus related equipment and services.

GE’s pension services are underfunded by $27 billion at the end of 2018. The pension plan is being moved from a defined benefit to a defined contribution such as a 401(k) plan in 2021. The difference is a guaranteed payout to one that moves up and down with the stock and bond market. Both have their advantages but the second one is less expensive for the company.

The company has struggle to boost profits amid a slump in demand for its gas fired turbines as more utilities move to solar and wind power alternatives. GE also faces potential costs of more than $1 billion in its jet engine unit from the grounding of Boeing’s 737 <ax airliner.

GE’s industrial net debt stood at $54.4 billion as of June 30. GE said it was on track to hit its target of less than 2.5 times net debt to earnings before EBITDA by the end of 2020.

Linking to dividend paying stocks, interest rates are at very low numbers which encourages companies to raise money by selling bonds, that can be a very good thing to do. However at some stage, if economy softens too much debt is very bad for investors. There is a balancing act it regards to debt, as a dividend based investor you like less debt than more debt.

There are more questions than answers, till the next time – to raising questions.

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