Florida Power & Light Case Study - Dividend Policy Essay

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Dividend Policy at FPL Group Inc.

Problem: On May 5, 1994 the utilities analyst of Merrill Lynch downgraded FPL Group Inc. due to an expectation of adjustment in dividend payments. The report also acknowledged the probability of a cut in the dividend. Kate Stark of First Equity Securities Corporation analyzes the situation and she has to predict what is going to happen. This investment alert was published dropped the stock price by 6% on the same day. 3 weeks ago Kate Stark has recommended a “hold” position for FPL Group. With the new report should she change her recommendation?
Electric Utility Industry: The electric utility industry is formed by three segments: generation, transmission and distribution. Securities and Exchange
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This involved building a new transmission line, refurbishing of the oldest generating plant, improving operating efficiency at all plants, and buying a majority share in a coal burning plant owned by a utility based in Georgia. By 1994 operating efficiency had improved dramatically; nuclear plant availability had risen to 83% (industry average: 70%), and fossil fuel plant availability risen to 89% (Industry average: 83%).
These expenditures are funded through internal profits and by issuing $3.7 billion of long term debt and $1.9 billion common stock. Headcount reduced by 30% while operating and maintenance expense reduced from 1.82/kWh to 1.61/kWh from 1990 to 1993. As a result FPL became the largest utility in Florida by 1994 (fourth largest in the country).
Financially 1993 was a record year: FPL’s capital expenditure was expected to decline by 33% over the next five years. Annual sales growth of 3.4% for the past five years exceeded the national average of 2% and was expected to exceed the average again for the next five years (2.7% vs. 1.8%).
New S&P Guidelines for Evaluating Investor Owned Electric Utilities
Starting October 1993, S&P started including an evaluation of a utility’s competitive position as part of its financial rating. It would consider such factors as the prospects for customer and sales growth, revenue vulnerabilities and dependencies, rates
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