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Dividend Policy at FPL Group

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by

Chris Ertel

on 10 December 2013

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Transcript of Dividend Policy at FPL Group

Case 6 Presentation
Chris Ertel
Parker Dane
Ruchir Shah
Robert Djakovic
Xue Cao
Meirui Piao
Linda Duong
Buy
19.6% drop in stock price from September 1993 to May 1994
Sell
Payout ratio
Future earnings prospects


Alternative Concerns
Hold
Grow out of high payout ratio
Keep dividend at $2.48 per share
Cut dividend
Changes to operating cost structure
Selling recent acquisitions
Reduced operating expenses

Buy, Sell, or Hold?
Investor Clientele
Firms can avoid paying excess tax
Less cash on hand
Avoid interest bearing accounts
Strong signal to investors of company’s financial health
Reduce Agency Cost
Managers may use excess cash in a riskier manner.

Advantages
The Rise of Deregulation
1989 – James Broadhead took over company
Brought along some changes
Scaled back on quality control
Sold several non utility companies
$6.6 Billion expansion over 5 years
Reduced employees

The Broadhead Era
1925 – First major Subsidiary
Growth until 1970’s
4 major acquisitions
Marshall McDonald
Japanese quality control
Complaints went down 60% as a result
Problems
Employee morale
Government watching some plants

Company Background
Tax rate for dividends higher than capital gains tax rate
Public’s expectation for continued or higher dividend payment

Disadvantages
Payment from a firm to their shareholders from excess cash
After: debt payments and retained earnings level met (back up cash for unforeseen circumstances and positive NPV investments)




What are Dividends?
40%

28%

Berk, J., & DeMarzo, P. (2013). Corporate Finance (Vol. Third). New York: Pearson. p. 594

Factors that influence a preferred dividend policy
Taxes
Desire for Cash Payment

Investor Clientele
Individuals
Pension and Retirement Funds
Corporations

Questions?
Estimated Growth
Considered too high
High payout ratio
Currently 90% versus industry average of 79.9%
Can use cash to meet future uncertainties surrounding retail wheeling
Show strong dividend growth in future




Payout Ratio – FPL Perspective
Appropriate for industry
Expect high payout ratio in industry
Mostly pension funds and retirement accounts
Want high dividend payout to meet income needs

Payout Ratio – Investor Perspective
Industry Comparisons
Issues Facing FPL Group
Industry deregulation and retail wheeling
Potentially increased competition
Rising interest rates
Decreasing net income
Decrease in share price
19.6% drop
Dividend Payout Ratio Dividend Yield
Dividend Policy at FPL Group
Full transcript