Fpl Case

Decent Essays
Fin 4422
Buy, Sell, or Hold FPL Shares?

Dividend Policy of FPL Group’s case is about if investors should buy, sell, or hold the decreasing shares of FPL stock. Florida Power & Light (FPL) is one of the largest electrical companies in the United States. An analyst from Merrill Lynch downgraded the FPL stock after months of decreasing share price. On May 5th 1994, Florida Power & Lights’ stock price fell by 6 per cent after that analysis. From September of 1993 to May of 1994 the price has decreased by 19.6 per cent. Income investors and growth investors are the two ways that people like to invest. Companies like FPL pay a portion of earnings back to their shareholders in the form of dividends. Income investors are highly
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Management is blaming the dividends but would altering them really help?

The three ways to affect a dividend are decrease, increase, and hold. That is the big debate that FPL has gotten into. In 1994 dividends were at $2.48 with over 90 per cent of a payout. Utility companies tend to have a high payout but the rest of the companies were only in the 70’s. Management thinks that FPL should cut back on their payout ratio by around 30 per cent. That would be great but the company doesn’t have much room to expand. FPL only has an 8.6 per cent capacity margin which doesn’t give them much room for internal growth. Also, companies such as Consolidated Edison Company of New York and Sierra Pacific resources tried to lower dividends and they got into major trouble financially. Lowering dividends is portrayed by shareholders as a company going into financial trouble. That would cause the stock price to fall even more and would cause the company to potentially collapse.

If FPL were to increase the dividends, it would be a delight to income investors. They would see a higher portion of cash and expect the company to be on the rise. FPL already had a 90 per cent payout ratio and there isn’t much more they can give. If they did they would have no net income to put back into the company for internal growth. In 1992 the National Energy Policy Act (NEPA) was established and forced the utility companies to make their transmission systems more
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