Fpl Dividend Policy

Staff Analysis

Statement of the Problem

A securities analyst on Wall Street named Kate Stark has recently determined that the FPL Group, the holding company of Florida Power and Light (FPL), might vote at the upcoming annual meeting to either freeze or reduce its dividend of $2.48 per share. The markets reacted with a swift 6% decrease in FPL’s stock price. Ms. Stark must decide whether to recommend FPL to her clients as a ‘hold,’ ‘buy,’ or ‘sell’ after delving into FPL’s financials and the current state of the U.S. electric industry. In the meantime, FPL Group has three alternatives to choose from in regard to its dividend policy:

1. Cut quarterly dividends from $.62 to $.42

a. Signals that the company might be doing poorly

b. Increases price volatility in the short-term

c. Remains a smart move if, due to increased regulation, future investment returns exceed required returns on equity which would make internal funding cheaper

2. Maintain dividends

a. Signifies management confidence in future growth figures

b. Decreases likelihood of short-term price volatility and perceived risk

3. Increase dividends – Purely hypothetical; not at issue in this case

Discussion

Industry Background

Presently, the utilities industry is undergoing a comprehensive transformation as it moves away from the local, regulated monopoly structure to one of a less regulated, more competitive environment. This has encouraged industry players to invest in new technology, increase in breadth and scope, and hone customer service skills. FPL has already responded by installing James Broadhead as Chairman in 1989, scaling back quality control programs, and increasing capital expenditures.

FPL Inc.’s Current Status

As Chairman, Broadhead initially decided FPL had to refocus on its core business and engineered to sell many of the firm’s smaller, non-utility businesses. He also launched an aggressive campaign to increase...