Dividend Policy at FPL Case 4.docx

Case 4 Dividend Policy at FPL Group, Inc. (A)

Team members (G13):

Mohamm ammad Akrama amali

0227/52

Pasupuleti Shalini

0272/52

P.S.M Siddartha

0278/52

Priyanka Sarkar

0296/52

1. What are the main issues confronting confronting FPL Group Group in May 1994? Which Which amongst those you identied are releant to the diidend decision?

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With the dereulation in early !99" #rouht a proposal #y # y the State o$ %ali$ornia to the ta#le introdu&in the notion o$ retail 'heelin. As a result o$ retail 'heelin initiati(e) %ali$ornia*s three larest utilities lost total o$ +!.8  #illion in market (alue in one 'eek. 2, other states #ean to &onsider &on sider (ariations o$ the %ali$ornia retail 'heelin proposal. -hese proposals had a pro$ound e$$e&t on the &ompetiti(e lands&ape o$ the utilities industry. As o$ a result o$ this ne' &ompetition) &ompanies &ompan ies must ree(aluate their #usiness strateies to a&&ommodate this ne' &ompetiti(e en(ironment and remain su&&ess$ul. A pre(iously mature industry is no' trans$ormin into an industry 'ith prospe&ts $or ro'th. P*s P*s sto&k pri&e has $allen #y # y !9.6 'hile S1P inde has de&reased #y 22.! 3espite sellin / 'ritin o$$ se(eral a&4uisitions) P P  still maintained S nery) ne ry) -urner oods and ualte& uality Ser(i&es a'suit $rom the lorida Muni&ipal Po'er Aen&y is still onoin and may ha(e material impa&t to the $irm*s operations Relevant to dividend decision-

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As a result o$ the no' &ompetiti(e lands&ape) Standard and Poor*s ratin roup announ&ed a re(ision o$ its uidelines $or e(aluatin e( aluatin in(estor o'ned ele&tri& utilities. e&ause o$ the &ompetiti(e market) the di(idend pay 'ill #e redu&ed as it 'ill use the &ash in positi(e :P pro;e&t.  a&tors in the ne' uidelines uide lines in&luded &ustomer and sales ro'th prospe&ts) re(enue (ulnera#ility and dependen&ies as 'ell rates #y &onsumer &lass relati(e to &ompetin utilities amon others

!. From FPL"s FPL"s perspectie# perspectie# is the current current payout ratio ratio appropriate? appropriate? $f not# %hat is appropriate? a ppropriate? P*s P*s &urrent payout ratio ra tio &ash di(idends/net in&ome <2."7?!9!.5=/527 89.75 A&&ordin to ehi#it 9) P has the hihest payout pa yout ratio in &omparison to other ele&tri& utilities in the same industry With dereulation i(in rise to &ompetition P @roup) n&. needs to $o&us its operations and #ein to ro' its #usiness in order to sur(i(e. •

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y retainin only 9 o$ its earnins) the $irm 'ould $ind it (ery di$$i&ult to ro' 4ui&kly 'ithout the epensi(e a&4uisition o$ &apital. -he &urrent di(idend payout ratio is too hih &onsiderin the &hallenes the &ompany 'ill $a&e in a dereulated and &ompetiti(e en(ironment. P &urrently maintains an inappropriate payout ratio. @i(en the situation that the ne' reulation 'ill #e soon implemented) P 'ill $a&e stron &ompetition not only $rom lorida #ut also $rom all other states. -o prepare $or &ompetition and sustaina#le ro'th in near $uture P should use its e&ess &ash to in(est in ne' positi(e P: pro;e&ts.

-here$ore P should not maintain hih payout ratio at !07.,. nstead it should lo'er to or #elo' a(erae ratio o$ industry 'hi&h is around 82.9 sin&e the di(idend &ut does not lo'er the $irm (alue. &. From an inestor"s inestor"s perspectie# perspectie# is the payout ratio appropriate? appropriate? P in(estor ndi(iduals 5!.9 nstitutions ,6.9 SP !.! •

ndi(idual n(estorsB C t 'ould #e ad(antaeous $or indi(idual in(estors to ha(e P*s P*s 3i(idend payout ratio at a lo'er le(el $or the $ollo'in reasonsD E -a -a ad(antaesD 28 &apital ains ta :s. Fp to ,9.6 personal in&ome ta. Possi#ility o$ sto&k repur&hase plan in the $uture Allo's di(idend payout ratio to ro' in the $uture Possi#ility $or in&rease in sto&k pri&e &aused #y hiher ro'th rates. • • • •

or indi(idual in(estors the payout ratio has little meanin #e&au se they &an use homemade di(idend stratey to o#tain &apital ains rather than re&ei(in hih &ash di(idends and payin ta on them. urthermore they do not need di(idends to &on(ert shares to &ash. nstitutions n(estorsB or institutional in(estors) this payout ratio may #e appropriate #e&ause the y pre$er hih  payout ratio in seekin $or hih earnins $rom their in(estment. P has to in&rease the ratio o(er time to satis$y these in(estor*s epe&tations. •

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4. 's (ate )tar*# %hat %ould you recommend recommend regarding regarding inestment inestment in FPL"s stoc*? y &al&ulatin the share pri&e 'hi&h has in&reased due to the di(idend pay &ut .
So P should #uy #a&k the shares to retain its share pri&e. ut in the lon run) the &ash $rom the di(idend pay &ut 'ill #e utiliGed in positi(e :P  pro;e&ts 'hi&h 'ill in&rease its share pri&e. So the shares should should #e #ouht to ain a lon term pro$it.