Dividend Policy at Fpl Group

2283 Words Jun 19th, 2013 10 Pages
Subject: Dividend Policy at FPL Group, Inc.

Problem: Should FPL cut dividend? And should Stark revise her investment recommendation? Options: 1) Keep dividend per share growth at 1.65% 2) Dividend per share grows at 1% 3) Keep dividend per share constant at $2.46 4) Cut dividend by 30% and repurchase 10 million shares each year after the cut

We recommend FPL to cut dividend by 30% in order to free up more cash to facilitate its growth and fight the upcoming competitions, and repurchase 10 million shares each year after the cut to offset the negative signaling impact.


1) Industry Overview
The generation, transmission, and distribution of electricity was classified as the vital public service.
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There were many potential competitors of FPL in Florida including, 3 major investor-owned utilities, 20 municipal and rural cooperative generating systems, and 19 independent power producers. Also, there were other large investor-owned utilities in neighboring states, which would target consumers in Florida.
Under a dramatic changes of the market competition, S&P came up with a new evaluation system, which rated FPL as one of the top 10% investor-owned utilities and upgraded its senior secured debt to A-plus and its senior unsecured debt to single-A. Despite of its upgraded debt rating, FPL experienced the 1.4% increase in its long-term interest expense since 1994. Along with an intensified competition and a higher interest rate, FPL’s stock price went down by 19.6%, which was still smaller than 22.1%, by which S&P’s Electric Utilities Index decreased.
3) FPL’s Current Financial Position

FPL’s liquidity dropped from 1.004 in 1992 to 0.681 in 1993 as the growth rate of current assets was lower than that of current liabilities. The main contributions of the increase in current liabilities were significant increases in notes payable-commercial paper and deferred clause revenues. Equity increased significantly while there was a slight increase in assets and a small decrease in liabilities that debt ratio, debt to equity ratio and equity multiplier dropped by 0.2, 1, and 1 respectively. This showed that the firm’s risk decreased

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