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Fpl Case Study

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FPL Case Report

FPL Group, Florida’s largest electric utility company, announced to cut its dividend for the first time in 47 years in 1994 has shocked the public. An analyst named Kate Stark was frustrating about whether she should revise her advice about her current “hold” recommendation on FPL’s stock. Another critical issue FPL facing is that whether or not to change its current pay out ratio based on the growing competitiveness in the utility industry.
According to course notes and the textbook, dividends are a share of a company’s profits distributed to shareholders. Shareholders are the owners of the firm and dividends are their share of the firm’s profits. The advantage of paying dividends is that the dividend signals the firm’s financial stability. Paying dividends not only encourage current shareholders to retain their investment in the firm, but also increase the firm’s attractiveness to potential investor. The disadvantage of paying dividends is that the firm loss opportunities of further growing by having less liquid cash in hands. Paying a cash dividend may reflect the firm’s current success, but it weakens the firm’s ability to expand. The firm may decide to pay dividends later or reduce dividends amount to get the growth opportunity. Another disadvantage of paying cash dividends would be they are not tax deductible.
There are two reasons for FPL’s dividends cut. First is because of the recent deregulation trend in the utility industry and second is the fact that its dividend payout had increased a lot during 1990 to 1993, so the firm would like to reevaluate their dividend policy to maintain good competitive position within the industry. Therefore in 1994, management decided to cut its dividends as they realized that the risk of paying high dividend would hamper its financial flexibility as risks increased in a highly competitive environment.…...

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