FPL GROUP INC.

CASE STUDY
REPORT
DONE BY
AADHI SHIVANI S.
MS19A001
1. Why do firms pay dividends? What in general are the
advantages and disadvantages of paying dividends? Is the
dividend irrelevance theory applicable here?

• Firms pay dividends from their profits to reward their shareholders for

providing them the capital to run the business.
• Dividends are the short term cash flows expected by investors on their
investment in the shares of the company.
• Often, growth companies retain earnings while more mature companies
resort to dividend payouts.
• Dividends provide certainty about the company's financial well-being 
• Sometimes future dividends paid by the company help in determining its
stock price.
• It is also a sign of a company's strength and that management has
positive expectations for future earnings, which again makes the stock
more attractive.
1. Why do firms pay dividends? What in general are the
advantages and disadvantages of paying dividends? Is the
dividend irrelevance theory applicable here?

Disadvantages of paying dividends

• Taxes on dividends cannot be deferred and it has to be paid out in the
corresponding year itself. Taxes on capital gains can be deferred until the
investor wants to sell the stock.
• Opportunity costs of paying dividends might be a lost opportunity in a good
project or loss of expansion opportunities etc., Companies generally don’t tend
to pay dividends at such opportunity costs.
• Dividend policies are irrelevant as home made dividends can be created by
investors.
Advantages of paying dividends
• Attractive to investors and creates demand for stocks as it gives immediate
returns(short term returns)
• Reduces agency cost as firms are forced to seek external financing which brings
in control from external parties.
2.What are the most important issues confronting FPL
Group in May 1994?
• Falling stock prices. FPL’s stock price had fallen by 19.6% compared to S&P’s Electrical Utility
Index which had fallen by 22.1%.
• Stiff competition arising from deregulation of the transmission and distribution companies.
• On-going negotiations between FPL and Florida Municipal Power Agency as ordered by
FERC
• Retail wheeling poses tremendous opportunities but adequate capacity and proper
administration is required to reap profits out of the same when it would be adopted in
Florida. Currently it is being adopted in 23 other states.
• FPL is in search of a suitable buyer for its’ Telesat Cablevision and Alandco subsidiaries.
• Capital expenditures should begin generating revenue from the current year with additional
capital expenditures to meet future demand.
• High payout ratios in the past 47 years have to be gradually reduced.
• Interest rates have been rising. Currently 140bps increase in long term debt rate.
• Government policies in the sector change and adapt to meet environmental needs. FPL
must always be proactive in analysing its external environment.
 3.From FPL’s perspective, is the current payout ratio
appropriate? Would a higher payout ratio be appropriate?
lower payout ratio?
• The current payout ratio of FPL in 1993
is 107.46% as given in the adjacent
table. The payout ratios have always
been more than 60% in the pat 10 years
and DPS consistently improved year on
year in the past 47 years.
• The average industry payout ratio from
exhibit 9 is 80.96% in 1993
• The current payout ratio is higher than
required. A lower payout ratio would be
more appropriate for FPL as it would
provide the company more funds in the
scenario of increasing interest rates and
huge expansion opportunities available.
• If it keeps paying out such huge
dividends it will lose out on its long term
growth opportunities.
• Also FPL has the highest pay-out ratio
compared to all the major players in its
industry.
4.From an investor’s perspective, is FPL’s, payout appropriate?

• An investor who currently holds a stock in FPL would hold it for the huge dividends
FPL has been consistently paying. FPL’s practice has been to give out huge
dividends. Hence investors would be taken aback with the cut in their payout ratio
over the coming years.
• FPL has good opportunities with retail wheeling opportunities and it has to cope up
with stiff competition from new entrants and existing major players as well for
distribution of electricity.
• Though investors would be deprived of the current dividend incomes that they had
expected to receive, investment in positive NPV projects by FPL would only
enhance their capital gains in few years with growth in FPL’s revenue and business.
• Individual investors also have the option to create their own home made dividends
and they constitute 51.9% of the shareholding in the company.
• One viewpoint can be suggested that the dividend payout will not affect these
shareholders much as they have the home made dividend option. However this will
deprive them of their option to enjoy the future benefits from the company. ( this
option is not what the investors would prefer in this scenario as their expectations
would be very different).
 5.What will the CEO James Broadhead do?
• From exhibit 7 we can see that Carolina Power and The Southern Co. have large production of
76000KWH and 119000KWH respectively compared to 72500KWH of FPL group. Both these
companies have 26% and 27% share of their customer base in the industrial sector
respectively compared to FPL group which has only 4% of its customers in the industrial
sector. The case study also mentions that at first large industrial customers would choose
their electricity suppliers, then commercial users and finally the retail users would have the
right to choose their electricity suppliers.
• FPL group has 56% of its customers from the retail sector. While retaining its share of retail
customers FPL must develop a strategy to capture a good share of industrial customers as
well who are an easy and single point of revenue for FPL. FPL’s capacity utilisation is 59%
which is the average utilisation rate for its competitors as well.
• As already mentioned FPL has tremendous growth opportunities in capacity utilisation as well
as in distribution networks.
• The CEO should invest in these opportunities first for long term value maximisation of the
firm.
• He should reduce the dividend payout ratio and use the excess funds for the required capital
expenditures.
• Initially the stock price would definitely go down but gradually with the performance of FPL,
stock prices would pick up.
• FPL should use its excess cash to invest more in new profitable projects, acquire new
companies and profitable assets, and reinvest in financial assets.
6.As Kate Stark, what would recommend regarding investment
in FPL’s stock – buy/sell/hold?

• I would recommend to Hold the stock since it would

have good appreciation in the coming years despite
reduction in the dividend payout currently.
• It would be a good opportunity for FPL to buy back
its shares as well at the decreased market prices
thus putting its cash to use.
• Generally growing companies tend to pay very less
dividend as they would require funds for
investment in positive NPV projects.
WORKINGS
THANK YOU