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 …show more content…
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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The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.
The second option available for FPL was to slower the dividend growth to 1%. Analysis of exhibit TN-4 here shows that dividends grow from $465.61 million in 1994 to $484.52 million in 1998. The resulting negative net cash flows are still eminent in years 1994-1996 but become positive in 1997 with $121 million and 1998 with $116 million. The payout ratio is this option does become closer to the desired 80% by 1998 when the payout ratio is 81%
Indeed, FPL’s management may see this as an opportunity to gain more share in the Industrial and Commercial segments, making it a positive change, at least in the short-term.
The fact that shareholders are taxed twice through this repayment methodology infers that dividends are not their repayment technique of choice. Furthermore, paying out cash reserves through dividends also has the effect of both reducing the company’s assets and also inhibited the company’s ability to fund future growth as Dividends reduce the company’s retained earnings.
The discussion here must present the repercussions of a share repurchase decision on the share price, as well as on the dividend question. Signaling and clientele considerations must also be considered.
A dividend is a usually distributed in cash form to stock holders of a corporation approved by the board of director. It may also include stock dividend or other forms of payment. A stock dividend represents a distribution of additional shares to common stockholders. Dividends are only cash payments regularly made by corporations to their stockholders.
When deciding on changes to dividend pay-out ratio, there are several factors which must be considered. This piece looks at the different underlying theories which affect management’s decision, before looking at what policy would be considered best for FPL and how to implement a change.
After years of theoretical and empirical researches, the association between dividend policy and share price volatility still remains a source of controversy with absence of general consensus regarding that relation, were different studies have shown contradicting results using different models, and sometimes using the same model but on
The results of the regression did not show a significant relationship between the dividend policy and ownership duality. So, we cannot establish a relationship between dividend policy and ownership duality; hypothesis H2, in this case, is not validated. Concerning foreign ownership, the results indicate a positive and significant relationship between the level of the presence of foreign shareholders and the level of dividend distribution. The relationship between the two variables is significant at the 5% level. In other words, the more the level of foreign ownership increases, the more the level of distribution of dividends increases. Consequently, Hypothesis H3 is supported.
There are many theoretical and empirical results describing the decisions companies make in this area. At the same time, however, there is no generally accepted model describing payout policy. Moreover, empirical findings are often contradictory or difficult to interpret in light of the theory. In their seminal paper, Miller and Modigliani (1961) showed that under certain assumptions dividends are irrelevant; all that matters is the firm’s investment opportunities. Miller and Modigliani considered the case of perfect capital markets (no transaction costs or tax differentials, no pricing power for any of the participants, no information asymmetries or costs), rational behaviour (more wealth being preferred to less, indifference between cash payments and share value increases) and perfect certainty (future investments and profits are given). In real life, however, people seem to care about dividends. Lintner.s (1956) classical study on dividend policy suggests that dividends represent the primary and active decision variable in most situations. Lintner suggests a model of partial adjustment to a given payout rate.