Fpl Case

Subject: Investment Recommendation on FPL
Date: 3/5/2013

FPL is one of the largest utility companies in Florida and the fourth largest in the country. The company has continuously had great financial quarters while offering one of the highest dividend amounts in its industry. 1993 was a record year for FPL with $514 million in net come and dividends amounting for $2.75 per share. With operating efficiency continuing to improve as time goes on, the company looks like it has a positive future.

Important Issues
The main issues facing FPL and its investors are if the company will be raising its dividend amount or keep it at the same level as it currently is. Also how will the competitors in the industry going to affect FPL’s returns depending on if the electricity market in Florida is deregulated. Other issues that face FPL is with regards to the subsidiary holdings that are not involved in electricity. Several of the recent acquisitions have caused large losses for FPL and have hurt the bottom line of the company. With loses of over $250 million since being acquired Colonial Penn has hurt the net income of FPL. Furthermore, the management style that allows for better quality control has seen to be starting to cause some
damages and slowing efficiency for the profits of FPL.

Dividend Payout
The reason that management believes that the current dividend payout is appropriate is because investors in the past have expected high dividend yields coming utility companies because of the high levels of debt that these companies operate at. In addition, cuts in dividends are not common for companies in the utilities sector unless they are in real financial trouble. FPL can’t afford to pay out 90 percent of its earnings because of the need for growth and the entrance of new competitors into the industry. FPL must eventually prepare for changes in it financials and payout ratios, because of increased risk and uncertainty that is involved with deregulation. Another reason why management believes that the current dividend payout is appropriate is because the S & P electric utilities index has fallen by 22.1%, two percent more than the stock price of FPL. This shows that the entire industry is not doing so well right now and by maintaining its current dividend payout, FPL can show that it has a positive future. The reason for this is because management expects FPL to decrease its capital costs while increasing its sales in 1994.
Factors effecting dividend policy It is important to recognize the companies current financial position to see if the dividends they are offering is a good investment.
Internal Factors that should be considered when determining dividend policy: Shareholders decide the rate of dividends.
Investors favor dividends because it will reduce uncertainty with their investments and make them confident in the company’s return. Another factor is financial needs; in FPL’s case the company should cut back on dividends in order to increase profit. Companies need to be aware of the financial needs of the company whether it means to offer dividends or reinvest money back into company for growth. Finally there is liquidity factor should be considered to see if the company is able to payout the actual cash dividends. Sometimes companies have good earnings but are unable to carry out the cash to account for the
dividends
External factors that should be considered when determining the dividend policy: The economy (deregulations in Florida) factors will cause uncertainty in different industries. It is important for a company to realize the different economic cycles, which will affect a large part of the earnings. Another factor would be inflation, being aware of the inflation rate will help a company plan the price of the dividends. Finally Legal restrictions are another factor that should be considered, which allows a company to pay out dividends. There are some regulations that will prevent a company to payout dividends Recommendations The main factor that should be considered is the decision of reducing their current dividend policy. This would be considered a good idea because it will help reduce exposure to current industry risks that they may face. Since capital gains are taxed less that dividends, the idea of reducing their dividend policy can save money for investors with regard to the amount of tax they pay. There are also some negative reactions that could come about when reducing their dividend policy. There is a potential for a lower stock price because by reducing their dividend it signals to the shareholder and the market that their may be an issue coming up in the near future. We feel that it is more reasonable to reduce the current dividend policy because if we look at historic data the one time the dividend policy was dropped was when the company was in serious financial trouble. If it is dropped the share price will often plummet due to the negative reaction of the market. By reducing dividend payouts we would be expecting a drop in stock price, but with our excess of cash the company could buy more stock increasing the price.

We would recommend holding FPL’s stock for the reasons that have been given above. While reducing the payout we will expect sales to increase and presume that our earnings will continue to grow. We believe that FPL will keep their dividend the same for the short term. If FPL does not have a huge dividend cut or as long as the policy is not dropped we will go ahead and recommend a hold for current shareholders.