Fpl Group, Inc

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Dividend Policy at FPL Group, Inc.
FPL Group, Inc., the Florida's largest electric utility company, after 47 years of uninterrupted increase in dividends, was considering cut dividends in 1994. How would this unusual move affect FPL and the investors? Meanwhile, what would Kate Stark, the analyst at the Equity Securities Corporation, recommend regarding investment in FPL's stock - buy, sell, or hold?
1. Current Dividend Policy at FPL • FPL’s current payout ratio = Dividend per Share/Earning per Share = 2.47/2.30 = 107.4%. (Exhibit 4b) High relative to other utilities (exhibit 9) • Current Dividend Yield = Dividend per Share/Price per Share = 2.47/33=7.5% (Exhibit 4b&Exihit 8) Average level among utilities • Historic Dividend Policy: 1985 through 1993, payout has risen from 62% to 107.4% ;While during the same period, percentage increases in dividends has decreased from 9.6% to 1.6%
2.Why FPL consider cut dividend? • Challenges facing the FPL Group in May 1994: ✓ High pay-out ration will be unsustainable: The advent of retail wheeling threatens to reshape the entire electric utilities industry. It will bring more challenges to FPL. ✓ Low capacity Margin: 8.6% (Exhibit 7) which means FPL has less room in term of growth compared to peers. Need to invest in capacity to deal with the increased competition. ✓ FPL has a large amount of debt, and reducing the dividend could facilitate FPL debt repayment. FPL stock has fallen dramatically over the period of higher interest rates. • Benefit from cutting dividend: ✓ Generate lot of FCF, give FPL financial flexibility
3.Dividend Policy Theory: • Dividend policy is irrelevant: If no taxes/No transactions costs/No uncertainty: A dividend policy is irrelevant or has no impact on the firm’s value because investors have the ability to create "home-made" dividends. • The…...

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