Case For Exam Dividend Policy

Dividend
Policy
FPL Group Inc

Financial Management - I
Group 11
Kinnari 20121026 | Krutika P 20121028 | Tushar 20121058 | Vijay 20121062

Agenda

 Case Background
 Decision Rationale

 Financial Analysis
Reflection and conclusion

Financial Management – I | Dividend Policy at FPL Group Inc.

Case Backgound

Synopsis
Current Situation

Case
Description

Recommendation

Competitive
Position

Financial Management – I | Dividend Policy at FPL Group Inc.

Background behind FPL’s decision in dividend
 In 1992, federal regulators introduced wholesale wheeling and, by mid-1994, state regulators in 23 states are considering retail wheeling proposals.
 When the California regulators released their retail wheeling proposal, the three largest utilities in the state lost a combined
$1.8 billion in market value.
 S&P Electric Utilities Index has declined more than 20% since
September 1993.
 While much of this can be attributed to the increase in interest rates, some portion of the decline is due to the effects of deregulation.

Financial Management – I | Dividend Policy at FPL Group Inc.

Possible Alternatives

Increase dividend
Remain the same! ($2.48 per share)

Cut dividend

Financial Management – I | Dividend Policy at FPL Group Inc.

Key Assumptions
Efficient Market Hypothesis apply

 Analysts’ investment rating are limited to 3 options
 Buy
Sell
Hold
 Signaling exists in market place

Financial Management – I | Dividend Policy at FPL Group Inc.

Decision Rationale

Why would FPL want to increase dividend
 Meet Market expectation and legacy of increasing dividends since last 47 years
 Signal good earnings perspective and better future investments to face the growing competition out of deregulation Financial Management – I | Dividend Policy at FPL Group Inc.

Why would FPL want to decrease dividend
To signal worsening industry prospect.

Increased competition leads to increased volatility in earnings.  Other concerns than signaling. Taxes,