(Sr

ikant Sharma, Roll No.- S153F0036)

Dividend Policy at FPL Group, Inc. (A)

1) Why do firms pay dividends? What in general are advantages and
disadvantages of paying cash dividends?
Ans) A company pays dividends in order to attract more investors.
Sometimes, profitability and capital funding opportunities for a company
deteriorates. Therefore, paying higher dividends might attract
investments from new investors. They pay dividends to balance the assets
and capital structure when the earnings outstrip the investment
opportunities. Also in order to mitigate the agency problem when there
are excess earnings, the dividends are paid by the firms.
Advantages: 1) A firm paying dividends consistently are preferred more over the firms
paying no dividends by the investors. So, there is less risk involved.
2) Tax benefits in the form of exemptions.
3) It increases stock prices of a company.
4) It shows the value and stability of a firm.
Disadvantages: 1)A firm paying dividends is left with lower retained earnings which affects
its further growth and expansion.
2)Even if it is the sign of value for a company, but in real life it doesnt
impact the value of the company.
3)Dividends are taxed as ordinary income, it can reduce internal source of
financing.
4)Little to no dividend pay-out is more favourable for investors. This is
because taxation on dividends is higher than taxation on capital gains.
2) What are the most important issues confronting the FPL group in 1994?
Ans) James Broadhead came to FPL from GTE, he began developing a long
range strategic plan. The first step was an environmental scan, and from
it, it was concluded that FPL would need to have a commitment to quality
and customer service increase its focus on the utilities industry, expand
capacity, and improve its cost position. Although, he determined that a
commitment to quality was essential, he believed the quality program

needed to be scaled back. To reverse the FPLs diversification program,

Broadhead made plans to sell several of the non-utility businesses. By
1994, FPL had written off and was trying to sell both Telesat Cablevision
and Alandco. However, FPL still owned three nonutility subsidiaries i.e. ESI
Energy, Turner Foods, and Qualtec Quality Services, that contributed 2%
of total revenues. By 1994, operating efficiency had improved
dramatically. FPL funded its expansion through internal profits and by
issuing stocks. By early 1994, Broadheads strategic redirection was
showing signs of success. FPL was the largest utility in Florida, provided
power to 3.4 million customer accounts, and had a service territory
covering almost 28,000 square miles. Financially, 1993 had been a record
year for FPL, so 1994 expected to be even better due to decreasing capital
expenditures and increasing sales. Whereas capital expenditures had
totalled $5.8 billion during the past 5 years, they were expected to decline
by 33% to $3.9 billion over the next 5 years. FPLs sales growth had
exceeded the national average over the past 5 years and was expected to
exceed the national average over the next 5 years as well.
3) From FPL perspective the current pay-out ratio is appropriate. Would
higher pay-out ratio be more appropriate then lower pay-out ratio?
Ans) Payout Ratio for a company is given by: Payout Ratio = Dividend Per Share / Earnings Per Share = 2.48/2.75 =
It is the proportion of earnings paid out as dividends to the shareholders of
a company. A lower payout ratio might be better for a new company
whereas a higher payout ratio for a well-established company. From FPLs
perspective the dividend payout ratio is inappropriately high. Its industry
is facing high risk. Not a lower payout ratio would be preferred as other
companies are paying much lower payout ratio. Initially, company has a
competitive advantage in terms of payout ratio but the market conditions
are not favourable. Therefore, it can lower it only by few percent so that it
maintains its competitive advantage. A higher payout ratio would mean
that it will have to pay higher proportion of earnings to its shareholders
due to which its retained earnings would decline.
4) From an investors perspective, is FPL pay-out ratio is appropriate?
Ans) The Dividend Payout Ratio indicates the percentage of each dollar earned that is
distributed to the owners or shareholders in the form of cash. Payout ratio is an important
metric to consider when analyzing a company and whether one would like to commit money
to a position. Investors can use the payout ratio to determine what companies are doing with
their earnings. Investors seeking high current income and limited capital growth prefer
companies with high Dividend payout ratio. However, investors seeking capital growth may
prefer lower payout ratio because capital gains are taxed at a lower rate. In this case of FPL
payout ratio was too high and this company was well known for high dividend payout ratio
and a higher payout ratio means a company is paying out a higher percentage of their

earnings to shareholders. Hence, from an investors perspective FPL payout ratio was
appropriate. Mathematically, the pay-out ratio is: PR= Dividend Per Share/Earnings Per Share
Where, EPS= Net Earnings/ Number of Shares
Dividend share was $2.48/share so the dilemma was whether they should keep it $2.48 only
or increase it slightly. If they kept it $2.48 per share then pay-out ratio would fall below 80%
by 1997, if FPL slowed its dividend growth rate to 1% pay-out ratio would fall below 80% by
1998 which means later than if first option is used and if FPL increases its dividend per share
then obviously it would increase the payout ratio (payout ratio increases with increase in
dividend per share and decreases with increase in earnings per share). Hence, from all aspects
from investors perspective payout ratio is appropriate.
5) As Kate Stark, what would recommend regarding investment in FPL
stock by sell or hold?
Ans) It should hold the payout ratio because it has seen that its stock
price had fallen by more than 6%. If it would decline, its stock price would
fall further.
6) Give an overview of industry in which FPL is functioning?
Ans) The FPL was operating under Electric Utility Industry. When
electricity was invented, it quickly became an important part of everyday
life. The concept of public utility developed in the late 19 th century to refer
to a monopoly supplier of a vital public service. The vital public service
in this case was the generation, transmission and distribution of
electricity. In exchange for the monopoly right to supply electricity power
companies agreed to let government agencies regulate their prices and
returns. In Florida, the Florida Public Service Commission not only
regulated rates but also determined what nonutility businesses a utility
could enter. The federal governments involvement in electric power
began in earnest with the passage of the Federal Power Act in 1935. This
act gave the Federal Power Commission the authority to oversee
wholesale electricity transactions. During the same year, Congress also
passed the Public Utilities Holding Company Act, which gave the Securities
and Exchange Commission the authority to regulate utilities with
interstate systems or substantial investments in assets not the industry
had evolved into a larger number of intrastate, and relatively
undiversified, utility companies operating under extensive federal and
state regulation. When the electric utilities industry entered the era of
deregulation, deregulation was proceeding at a slower pace. Fourteen
years later Congress introduced competition, with the passage of National
Energy Policy Act of 1992. This act required utilities to make their
transmission systems available to third party users at the same level of
quality and cost enjoyed by the utilities themselves. Prior to NEPA, a
generator could sell power into another territory only if another utility

agreed to transmit the power, after NEPA, a utility could demand access to
another utilitys transmission system. Shortly after NEPA took effect, legal
disputes arose over transmission access. One of the first cases involved
FPL and the Florida Municipal Power Agency. The municipal agency sued
FPL for charging excessive rates and denying fair access to its
transmission system. In October 1993, FERC interceded and ordered the
two parties to negotiate a settlement, the negotiations were still going on
as of May 1994.
7) Give the background of the company.

Florida power & light company (FPL) was formed in 1925 through the consolidation
of numerous electric and gas companies. Company enjoyed steady growth until the
1970s when fuel costs and construction cost overruns- FPL spent almost $1 billion
rebuilding a nuclear plant-reducing profitability. At the same time FPL began
experiencing operating problems which lead to problems like frequent outages and
increasing customer complaints about services.

To improve FPL groups profitability chairman Marshall decided to diversify higher

growth businesses and to establish a holding company structure so for that over next
few years FPL made four acquisitions: colonial penn life insurance company, telesat
cablevision, CBR information group inc and turner foods corporation.
To address the problems in operations, Marshall instituted a program of Japanese
inspired quality control which included 1700 quality control teams examining every
aspect of the business for ways to improve operations. As a result unscheduled
downtime fell from 18% to 4% and also customer complaints fell by 60%. They also
received an award for one of the best-managed U.S. corporations. Despite of such
achievements there were some major problems left like colonial penn had lost more
than $250 million since being acquired, a 1988 survey indicated low employee morale
largely due to burdens imposed by the quality management program.
James came to FPL who was selected by FPLs board when Marshall got retired. He
developed a long-range strategic plan which included environmental scan, employee
teams were formed and they were asked to speculate about industrys future in terms
of technological requirements, regulations and customer needs.
From scan James concluded that company need to have a commitment to quality and
customer service, improve its cost position, expand capacity.
He also observed that quality program was putting burden on employees since paper
work had grown so he streamlined the quality process by cutting meetings, number of
quality teams and reports.
He also made plan to sell several nonutility businesses. So he sold colonial penn after
tax loss of $136 million.
He commenced expenditure program designed to meet projected demand into next
decade. This program included FPL budget of $6.6 billion, spread over five years.
Other projects included building transmission line, refurbishing the oldest generating

plant, improving operating efficiency at all plants, buying a majority share in coalburning plant owned by The southern company.
These efforts for improvement results in availability of nuclear plant increased to 83%
and also fossil fuel availability risen to 89%. All these expansions were funded
through internal profits and by issuing $3.7 billion of long term debt and $1.9 billion
of common stock.
FPL eliminated 2300 positions in 1991 and another 1700 positions in 1993. These
efficiency gains lowered operating and maintenance expense.
FPL came out as one of the successful and largest utility in Florida.
Competition increased and due to this increasing competition standard and poors
rating group (S&P) announced a revision guideline for evaluating investor-owned
electric utilities in October 1993.
After evaluating S&P rated FPLS business position above average, placing it in the
top 10% of investor-owned utilities. Because of its competitive position and its
improving financial performance, S&P had upgraded FPLs senior secured debt to A+
and its senior unsecured debt to A.
Despite the improvement in debt ratings, there was some concern about the
companys interest expense given the 140 basis point increase in long term interest
rates since September 1993.
During this period of rising interest and competition FPLs stock price had fallen by
19.6%.

8) Attempt to do a SWOT Analysis for FPL.

Ans)
STRENGTHS
1)There was quality management.
2)Planning and strategies of Broadhead, that led to the organisations
success.
3)Forty seven year dividend streak, highest payout ratio.
4)Above average S & P rating.
WEAKNESS
1)There was a mismatch between demand and supply.
2)Reduction in the prices of stock.
3)Low morale of employees.
4)Operating problems.
OPPORTUNITIES

1)If FPL slowed its dividend growth rate to 1%, its payout ratio will fall by
80%.
2)To increase the dividends in the future years, FPL should not cut its
dividends twice.
3)FPL needs to increase its quality customer service and utility service.
THREATS
1)Competitors in the market.
2)By cutting its dividends, it tends to lower its payout ratio.
3)If earnings are more than its dividends, then payout ratio will fall.