Divident policy at FPL group, inc.

Submitted By:
Group 17 (Section A)
Ankita Susan Tigga 0067/52
Ankur 0068/52
Ankur Jain 0069/52
Ashish Meena 0070/52

QUESTION 1:
What are the main issues confronting FPL Group in May 1994? Which amongst those you identified are releva
Ans. The main issues confronting FPL group in May 1994 are:
1. If retail wheeling started in Florida, it would allow customers to choose their own electricity provider. Hence, com
2. From September 1993 to May 1994, the companys stock price went down by 19.6%. It was a reflection of high de
3. The companys interest rate expense increased due to 140 basis points increase in the long term interest rates.
Out of these three, the interest rate issue is relevant to the Dividend decision
QUESTION 2:
From FPLs perspective, is the current payout ratio appropriate? If not, what is appropriate?
Ans. No, the current payout ratio is not appropriate from FPLs Perspective for the following reasons:

High dividend payout ratio is crippling the business. The capital expenditure of $5.8 B was majorly fin
Hence, the company should reduce its payout ratio to the median of the industry which is 80% as it w

QUESTION 3:
From an investors perspective, is the payout ratio appropriate?
Ans. No, from the investors perspective the current payout ratio is not appropriate. The payout ratio needs to be at lo
From the point of view of Long-term investors, they would dislike the high payout ratio as it makes t
The lower retention ratio also implies that the firm is not reinvesting its profits to fuel its long term g
Higher payout ratio may also mean that the firm is having to borrow and issue shares in order to fund
Even if we take a look at the exhibit 9, i.e. the sample of electric utility companies, the median for e
From exhibit 9, we can take a look at the other deregulated industries that have similar fixed asset he
A lower level of payout ratio is also beneficial to FPL, since it would allow FPL to grow its payout r
Lower payout ratio will fuel growth for FPL, hence leading to better performance in terms of stock p

QUESTION 4:
As Kate Stark, what would you recommend regarding investment in FPLs stock?
Ans. As Kate Stark, we would recommend a sell rating, based on the following reasons:
We see that around 37% of FPLs shareholders are institutional investors. Since these investors are se
In order for FPL to maintain its current level of payout ratio, it will have to take a greater amount of
Change of employee incentives is yet another alarming factor. The employees would now be motivat
There also seems to be uncertainty about how retail wheeling will affect FPLs business, since the co
Ongoing Litigation: Florida Municipal Power Agency sued FPL for charging excessive rates and den
FPLs Turkey Point nuclear plant is on the Nuclear Regulatory Commissions watch list for safety co

e you identified are relevant to the dividend decision?

icity provider. Hence, competition for FPL will increase from existing as well as new entrants.
was a reflection of high debt values and as a result higher interest expense.
ng term interest rates.

the following reasons:

f $5.8 B was majorly financed through issuing debt and equity and not using the company earnings. The Capita
try which is 80% as it will free the earnings which should be reinvested in the business through capex or operat

ayout ratio needs to be at lower levels than the current one. The various reasons for the same are:
gh payout ratio as it makes the business riskier due to dispensing excess cash rather than keeping it on-hand for losses/unexpecte
rofits to fuel its long term growth
issue shares in order to fund capex initiatives and dividend payout
ompanies, the median for electric utility companies is roughly 80%. Under the current circumstances of FPL, being among the hi
t have similar fixed asset heavy business models. The aerospace and telecommunications, for example have payout ratios of 31%
w FPL to grow its payout ratio in upcoming years.
ormance in terms of stock prices as well.

Since these investors are sensitive to the dividends that they receive, a dividend cut might lead them to sell the shares of FPL, he
to take a greater amount of debt. Higher debt implies that companys interest expenses go up, driving down its ability to spend on
yees would now be motivated to only improve the net income to meet the target performance, since net income, rather than a ran
FPLs business, since the competition would increase manifold in such a scenario.
ging excessive rates and denying fair access. As of May 1994, the case is still ongoing
ons watch list for safety concerns

ny earnings. The Capital Expenditure in the following years is going to be $3.9B which would again be needed to
hrough capex or operational improvements to make the company more competitive .

-hand for losses/unexpected payments

of FPL, being among the highest in payout ratio does not make sense.
e have payout ratios of 31% and 39%, respectively

to sell the shares of FPL, hence driving down the stock price.
down its ability to spend on Capex.
et income, rather than a range of financial and operating measures, is the criteria for evaluation.

ould again be needed to finance through debt if the same payout ratio is maintained. This will have an effect on

his will have an effect on the capital structure of the company (52% Debt if all is financed through debt).

d through debt).

Exhibit 9

Exhibit 9 Di vi dends by Industry a nd for El ectri c Uti l i ti esFi rst Qua rter 1994

S&P Industry Groups

Health Care (drugs)
Household Products
Tobacco
Publishing (newspapers)
Hardward and Tools
Foods
Chemicals (specialty)
Cosmetics
Telecommunications (long distance)
Beverages (soft drinks)
Textiles
Regional Banks
Aerospace/Defense
Retail (specialty)
Shoes
Hotel-Motel
Entertainment
Automobiles
Toys
Restaurants
Computer Software/Services
Electronics (semiconductors)
Airlines
Steel

Dividend
Payout Ratio

Dividend
Yield

69.4%
66.9%
65.7%
58.0%
53.6%
45.7%
39.7%
39.4%
39.3%
38.2%
34.7%
32.6%
31.0%
29.7%
25.5%
25.4%
23.9%
20.6%
16.0%
15.1%
10.9%
6.5%
deficit
deficit

4.1%
2.6%
5.2%
2.5%
2.8%
2.7%
1.8%
1.9%
2.3%
1.7%
2.2%
3.4%
2.3%
0.9%
1.6%
0.9%
0.7%
1.9%
0.8%
0.8%
0.4%
0.4%
0.1%
0.9%

106.2%
93.3%
92.2%
90.9%
90.6%
88.7%
88.0%
87.2%
87.0%
84.2%
81.9%
81.4%
81.1%
79.4%
75.5%
74.5%
72.3%
71.5%
71.3%
66.7%
65.5%
64.8%
61.5%
60.8%

9.6%
8.6%
8.7%
10.0%
8.4%
9.9%
9.3%
7.9%
7.7%
7.1%
6.6%
8.6%
9.0%
6.5%
7.1%
6.5%
7.1%
6.5%
8.5%
6.5%
6.6%
5.3%
7.7%
5.8%

Sample of Electric Utility Companies

Texas Utilities
Oklahoma G&E
Potomac Electric
Houston Industries
Delmarva P&L
SCE Corp.
NY State E&G
Central & SW
Public Service of CO
Commonwealth Edison
Northern State Power
American Electric
Ohio Edison
Dominion Resources
Consolidated Edison
PacificCorp
Carolina P&L
Southern Company
Pacific G&E
Entergy
General Public Utilities
Duke Power
Centerior Energy
Philadelphia Electric

Page 8

Sources: S&P Analysts' Handbook, September 1994 Monthly Supplement,

Barrons 5/16/1994, p. 16.

Dominion Resources
Consolidated Edison
PacificCorp
Carolina P&L
Southern Company
Pacific G&E
Entergy
General Public Utilities
Duke Power
Centerior Energy
Philadelphia Electric

Exhibit 9

79.4%
75.5%
74.5%
72.3%
71.5%
71.3%
66.7%
65.5%
64.8%
61.5%
60.8%

Sources: S&P Analysts' Handbook, September 1994 Monthly Supplement,

Barrons 5/16/1994, p. 16.

Page 9

6.5%
7.1%
6.5%
7.1%
6.5%
8.5%
6.5%
6.6%
5.3%
7.7%
5.8%

Exhibit 9

94

end
ield

1%
6%
2%
5%
8%
7%
8%
9%
3%
7%
2%
4%
3%
9%
6%
9%
7%
9%
8%
8%
4%
4%
1%
9%

6%
6%
7%
0%
4%
9%
3%
9%
7%
1%
6%
6%
0%
5%
1%
5%
1%
5%
5%
5%
6%
3%
7%
8%

Page 10

5%
1%
5%
1%
5%
5%
5%
6%
3%
7%
8%

Exhibit 9

Page 11