Dividend Policy at Fpl Group Essay

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Dividend Policy at FPL Group
FPL Group Overview:
The FPL Group was Florida’s largest electric utility group and the fourth largest in America. The FPL Group had annual revenues of exceeding $5 billion. Florida Power & Light Company, the main subsidiary of the FPL Group had 3.9 million customer accounts and covered a service area that included six of America’s ten fastest growing metropolitan areas.
a. Summarize the key elements of FPL’s financial policy and compare it with other relevant firms.
We are commenting on FPL’s financial policy from a dividend and capital structure perspective.
FPL has a very high dividend payout ratio of around 90% and has a 47 year streak of dividend increases. FPL’s dividend payout ratio is
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This would mean intense competition and may open up FPL to pricing pressure and in an adverse situation, losses. Such a situation has already been witnessed in California’s utility companies post introduction of retail wheeling in their state.
In light of the situation mentioned above, FPL has to ensure that it has the resources available to meet future competition where one of the determinants of winning or retaining new business may be price. Hence, its dividend payout policy must be modified to account for these industry changes.
c. How should FPL choose between dividends and share repurchases as alternative modes of payment?
The Modigliani-Miller clearly postulates that the dividend policy is irrelevant. The value of the assets of FPL should be independent of the financial structure of the firm. Also, the choice of dividend payments or share repurchases should not influence the share price as both methods are ways to distribute cash to the shareholders. However, this is true only in the Modigliani-Miller world where there are no costs related to taxes or financial distress.
In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

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