Dividend Policy at Fpl Group, Inc.
Problem
Kate Stark, the electric utilities analyst at First Equity Securities Corporation was faced with a decision involving FPL Group on May 5, 1994. Three weeks earlier, she had valued FPL with a “hold” recommendation due to the belief that FPL would either keep its dividend payout at $2.48 or increase it slightly. Today however, she saw a report from Merrill Lynch stating that they were downgrading FPL stock due to management’s concern that the dividend payout was too high given the increasing risks facing the industry. This report caused Stark to reconsider his previous “hold” rating and she questioned if she would need to issue an updated report. Our problem was to determine if FPL is likely to change their current dividend policy and how such a dividend policy change would affect shareholders. From that analysis, we are to decide how Kate Stark should advise investors with regard to FPL stock.
The Electric Utility Industry Evaluation
The electric utilities industry consists of three stages: the generation, transmission, and distribution of electricity. In the past, states had government agencies that regulated the prices and returns of utility companies. Due to several government Acts, the electric utilities industry became one with a large number of undiversified, intrastate companies operating under high federal and state government regulations.
During the 1970’s and 1980’s, there began a rise of deregulation in many monopoly service industries, including the electric utility industry. By 1978, regulatory changes had started to break down electric utilities franchises as competition was introduced to the generation and transmission states. Deregulation of distribution, the final segment of the industry, was also starting at the onset of 1994. The state of California had proposed the addition of competition to the distribution of electricity when the California Public Utilities commission released a proposal to phase in retail wheeling beginning in
Kate Stark, the electric utilities analyst at First Equity Securities Corporation was faced with a decision involving FPL Group on May 5, 1994. Three weeks earlier, she had valued FPL with a “hold” recommendation due to the belief that FPL would either keep its dividend payout at $2.48 or increase it slightly. Today however, she saw a report from Merrill Lynch stating that they were downgrading FPL stock due to management’s concern that the dividend payout was too high given the increasing risks facing the industry. This report caused Stark to reconsider his previous “hold” rating and she questioned if she would need to issue an updated report. Our problem was to determine if FPL is likely to change their current dividend policy and how such a dividend policy change would affect shareholders. From that analysis, we are to decide how Kate Stark should advise investors with regard to FPL stock.
The Electric Utility Industry Evaluation
The electric utilities industry consists of three stages: the generation, transmission, and distribution of electricity. In the past, states had government agencies that regulated the prices and returns of utility companies. Due to several government Acts, the electric utilities industry became one with a large number of undiversified, intrastate companies operating under high federal and state government regulations.
During the 1970’s and 1980’s, there began a rise of deregulation in many monopoly service industries, including the electric utility industry. By 1978, regulatory changes had started to break down electric utilities franchises as competition was introduced to the generation and transmission states. Deregulation of distribution, the final segment of the industry, was also starting at the onset of 1994. The state of California had proposed the addition of competition to the distribution of electricity when the California Public Utilities commission released a proposal to phase in retail wheeling beginning in
Bibliography: Van Horne, James C., and John M. Wachowicz Jr. Fundamentals of Financial Management. 10th edition. NJ: Prentice-Hall, 1998. "OGE Annual Report 1993." OGE . N.p., 03/29/1994. Web. 27 Nov 2010. .