Dividend Policy at FPL Group Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Dividend Policy at FPL Group Case Study Solution

Since Stark herself had issued a report on the FPL group with the Hold recommendation on the basis of the assumption that the company would either keep its dividend at 2.48 dollar per share or increase it slightly; the financial data provided in the exhibits shows that the company is not confronted with any financial distress.In fact, the financial projections of the company from 1994 to 1998 shows that the company would keep generating healthy profit returns caused by the reduction in capital expenditures, which in turn would to reduce the cash requirements for the upcoming years. In accordance with this, the decision of making significant changes in the current payoutratio of the company is not because of securing the survival of the company and it would not harm the equity and enterprise value.

In conclusion, Ms. Stark is recommended to maintain the recommendation on Hold and also to base her decision on the company’sfundamentals rather than short term fluctuation in the price caused by the reaction of market on the reduction in payout ratio. The announcement of the reduction in payout ratio to the shareholders, tends to reduce the price of stock, but this might not last a significant impact over the majority of its shareholders, individuals and other with 51.9 percent of the total shares in FPL). To deal with the issue of reduced stock price as a result of the announcement of reduction in payout ratio; the company can exploit the opportunity of using the excess cash to buy back its shares with core consideration over increasing the price of the stock whenever it falls down. Additionally, by buying the shares back; the company would be able to have an advantage of servicing the reduced capital base with relatively higher dividend yield. Not only this, the decision of buying back the stock would indicate towards a positive signal as the company perceives shares to be undervalued and it has confidence in the future profitability and revenue growth.

Recommended dividend policy

The current dividend payout ratio of 91 percent is much higher,and on account of the increasing risk of deregulation in the industry; there is anuncertaintydue to which the company should make changes in the dividend policy and align it with the competition. The reduction in the dividend policy of the company would increase the cash flows for the year. From the perspective of the company; the decision of reducing the payout ratio makes sense because of the fact that the company is already offering higher payout ratio than what market competitors are offering, due to which offering a higher payout ratio would bring constraint on the financial stability of the company by reducing its cash flows and financial flexibility. Additionally, the company might be confronted with the default risk if it continues to pay high payout ratio to the shareholders. Also, the company is recommended to exploit and capture the growth opportunities with the retained earnings.(Reeb, 2018).

In addition to this, with the implementation of the new regulations in the near future; the company would be threatened by a fierce market competition not only from Florida but also from all the possible states,due to which the company would find it challenging to protect itself by restricting the access to its transmission system as municipal agency has sued the company for denyingthe fair access to its transmission system and charging excessive rates. So, the company is advised to use and inject its excessive cash into revenue generating opportunities, acquiring businesses and reinvesting in the financial assets and profitable projects with high NPV to be able to stand against the market competitors. This would also makes the investors happier and satisfied as they would perceive that the investment in new projects with high NPV would not only result in high dividend but would also increase the shares’ price. (Capital gain).

Conclusion

FPL Group is the subsidiary of the largest electric utility: Florida Power and Light Company (FP&L). The company has been using a stable dividend per share policy and making regular payments of dividends to its shareholders and it has been consistently increasing the dividends to the high payout ratio. The company is planning to cut its dividend in the forthcoming years despite of its 47 year streak of constant dividend increase. The payout ratio of the company is relatively higher as compared to the competitors, due to which the company is recommended to reduce the payout ratio and align it with the industry average. Additionally, Ms. Stark is recommended to maintain the recommendation on Hold and to base her decision of the company on fundamentals rather than the short term fluctuation in the price, caused by the reaction of market on the reduction in payout ratio.............................

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