The fourth largest electric utility company in the United States and the largest electric utility in Florida is the FPL Group, which formed in 1925 from the consolidation of several gas and electric companies. FPL as a company continued to grow after 1925 because the ever increasing Florida population demanded more and more electricity. This trend continued until the 1970s when operating problems, and the rising cost of fuel and construction, caused a reduction of the company’s profitability. To address this issue, then Chairman Marshall McDonald, decided to make four major acquisitions: Colonial Penn Life Insurance Company, Telesat Cablevision Inc., CBR Information Group Inc., and Turner Foods Corporation. FPL also attempted to improve…show more content…
The fear in cutting dividends though always is in the hands of the shareholders, where their fears could cause a large drop in stock price.
The four options for dividend disbursement that FPL has are to first to keep the dividends at the status quo of 1.6%, second to slower the dividend growth to 1%, third to freeze dividend, and last to reduce or eliminate the dividend completely. When analyzing the first option, which is the keep the dividends at an increasing 1.6% per year, exhibit TN-4 shows that dividend payouts do increase from $468.38 million in 1994 to $499.08 million in 1998 with a resulting negative net cash after dividends every year till 1997 when cash is $110 million and 1998 when cash is $102 million. The payout ratio however does reduce to 84% by 1998.
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%
The third option was to freeze the dividend at $2.48 per share. The dividend payout stayed constant at $461 million from 1994 to 1998. With this, the