Dividend Policy at FPL Group, Inc.
Kate Stark, an electric utilities analyst, has recently issued a report on FPL Group with a “Hold” recommendation based on the assumption that FPL would keep its dividend at $2.48 per share or increase it slightly. In contrast, Merrill Lynch’s utilities analysts were considering lowering the investment rating for FPL group since they believe that FPL directors would not raise the annual dividends due to latent financial and competitive pressures. Therefore, Kate Stark must adjust her recommendation effectively to account for changes in FPL’s dividends policy with regards to the company’s financial situation. Alternatives:
Kate Stark has two options based on the dividend policy the firm decides to pursue 1. She can stick to her initial report and recommend her clients to hold FLP Group stocks.
2. She can alter her report recommend her client to either buy or sell FLP Group stocks. Recommendation:
We recommend that Stark maintain her “hold” position on FPL as we anticipate that the corporation will decrease its payout ratio to 61% in the current fiscal year, while reestablishing its ratio back to a 74% level over the next five years. Therefore, we have concluded that FPL will use this relative surge in retained earnings to implement a buyback program as a signal to the market to hold the stock. Kate Stark should stick to her initial report as we believe the share price will remain stable at a price of $32.57 per share.
Utilities Industry Background – A Competitive Landscape
The rise of the utility industry started in 1878, with the invention of the incandescent lamps. By the 1930, electricity was considered as a vital public service where its generation, transmission and distribution expanded across the United States. In 1935, the government was given the authority to oversee wholesale electricity transactions. During the 1970’s and 1980’s, deregulation weakened the monopolist nature and fixed-price system common in utilities sector. Thus, customers would have the opportunity to select their utilities contractors based on price competitiveness, which destabilized the local monopoly supplier. Progressively, the competitive landscape became saturated with marginal utilities companies expanding their distribution channels based on the current existing network instituted by the goliaths of the industry. Because of the changing market parameters, Standard & Poor’s Ratings Group announced a revision of its guidelines for valuation investor-owned electric utilities. This affected FPL’s general business rating, since it lay in the top 10% of investor-owned utilities. Competitive Business Position – Dealing with ‘Deregulation and Saturation’ Chairman James Broadhead’s vision for the electric utilities business was one of free and open competition, and he intended to better FPL’s position for such a marketplace. Initially, under Chairman Marshall McDonald, FPL underwent a period of diversification and expansion in the 1970’ and 80’s, acquiring major companies in various industries, such as real estate, insurance, and information services. Later, under Chairman Broadhead, FPL reversed that trend of diversification and instead, focused on streamlining their business and operation in order to improve efficiency and lower costs. The Ups
FPL’s service territory, eastern and southern Florida, is the country’s fastest growing market and FPL is expecting an annual sales growth of 2.7% (compared to the US average of 1.8% from 1993 to 1998) as well as an annual capacity growth of 1.6%. FPL, like most utilities companies, is a low beta stock, but the studied firm has a significantly higher dividend payout ratio than its competitors (91% versus an average of 75.17% for its...
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