Fpl Group

Although firms pay out the dividends to shareholders for various purposes, the main reason should be to reward shareholders. Dividends usually intend to signal to the investors that the company is currently undergoing stable operation. No one theory would define the benefits of dividend policy because it depends on the preference of investor.

There are many different investors within the market that prefer different payout ratios. Investors are willing to invest their money into companies that follow their preferences. If a company decides to change their policy that does not correspond to investors’ preference, they might sell the shares and shift to other investment options. If not enough shareholders replace this change in number of shares due to dividend policy change, the stock price might decrease. On the other hand, if there are enough shareholders willing to buy stocks with new dividend policy, the share price might go up. Investors such as pension funds and endowment funds prefer high dividends and, as a result, have invested into FPL group due to its high dividend payout. Thus, FPL’s clientele are those who prefer a high and consistent dividend. If FPL cuts dividend payout, those investors would sell their shares in the company resulting in potential decrease in share price. They might want to move to another company which maintains high dividend payout ratio. If this occurs, FPL stock price would go down.

Due to asymmetric information between the shareholders and managers of the firm, shareholders might view the change as an indicator showing future performance. Thus, if FPL management decides to go on with cut or zero growth in dividends, the investors might view the change as a negative sign such as future decrease in earnings and eventually share price. On the other hand, if FPL continues its growth in dividend payout, the investors would view it as a positive sign such as future increase in earning and eventually share price.

If FPL cut the...