Case 2- Cox Communications, Inc. (1999)

5. As Kate Stark, what would you recommend regarding investment in FPL’s stock – buy, sell, or hold?

A recommendation from Kate Stark would be based on the “what-ifs” in the following weeks – on the fence between the original recommendation to hold, and the possibility of future outcomes leaning towards buying. As Merrill Lynch had stated in their report in the beginning of the article, FPL seems to have no intention to raise the annual dividend above $2.48. Coupled with the fact that FPL’s management recognizes the fact that their dividend payout levels are high (though consistent with the industry average), it makes mention of two ways to address the high payout levels: to grow out of a high payout, and to cut dividends. Though Merrill Lynch ended by saying that they were expecting the dividends to remain, their assumption would be based on the historical fact that FPL has had a 47 year streak of returning an increase in dividends, and the company would be unlikely to differ. However, the bigger, more profitable picture must be looked at, rather than the immediate.

A Hold recommendation would be suitable only in the circumstances that FPL makes no moves in regards to dividends, and that the uncertainty surrounding the company and its industry remains murky.

However, FPL should be considering its possibility of profitability long into the future, and the company already recognizes one main factor which is holding it back: dividends. For future growth, it would be best that the company cut dividends by the theorized 30%. By doing this, share prices would drop as the market would react negatively in regards to the reduction, allowing the company to repurchase a substantial amount of their outstanding shares at lower prices. Following this, the proposed savings of over $150 million every year would allow for FPL to repay its debt, giving it greater financial flexibility, and allowing for more free cash flow. The foreshadowing of this possibility...