Essay About Corporate Finance And Dividend Policy

Dividend Policy at Florida Power and Light (fpl) Group Inc. Business Case
[pic 2]Corporate Finance[pic 3]Dividend Policy at Florida Power and Light (FPL) Group Inc. Business CaseLondon Business SchoolMasters in Finance 2018B1 GroupNovember 2017Group B1 – Dividend Policy at FPL Group Inc. (A)The purpose of this note is to answer following questions:What should Mrs. Starks recommend to her clients regarding FPL Group Inc. dividend policy? This is in a nutshell our recommendation to Mrs. Starks:Mrs Starks should recommend a “Buy” recommendation. Given recent management declaration, we expect the company to reduce its pay-out ratio. This would be consistent with a “newly growing deregulated industry”.Increased plowback ratio (i.e. decrease pay-out ratio) to 60% vs. 91% (in 1993) is expected to increase retained earnings, about $160million in 1993 for example, which would contribute to finance future planned capex ($3.9bn) given expected new competition. Also, the retained earnings could help to reduce FPL’s cost of debt and to adjust the company capital structure (if necessary) given Merrill Lynch downgrade.Individuals represent 52% of shareholders. Capital gain tax rate in 1994 was 39.6% and income tax rate 28%, representing an 11.6% of difference.FPL has a strong leadership led by Mr. Broadhead who managed GTE (recently deregulated industry), and successfully conducted a 5-year strategic redirection plan at FPL. Going forward, assuming forecast are reasonable, the company exhibits a positive perspective. FPL’s sales are expected to rise by 2.7% per year over the next 5 years (1994-1998) beating the national average expectation (1.8%). This creates room for future capital appreciation and increasing dividend distribution from a “new” lower level.The 6% decrease represents an opportunity of getting in at a reduced cost (buy low and sell high).Increasing competition in the electricity industry due to deregulationAfter having been local, regulated, stable and with limited or low level of competition, the electricity industry sector has been experiencing major changes due to deregulation. The electricity companies operate in 3 segments namely Generation, Transmission and Distribution. In 1978, Congress passed the Public Utilities Regulatory Policies Act (“PURPA”) which encouraged the creation of power plants using renewable or non-traditional fuels such as geothermal, solar, etc. Also, it required local utilities to buy all their electrical output. In 1992, Congress increased competition in the Transmission segment with the passage of the National Energy Policy Act which required utilities to make their transmission systems available to competitors from another state at the same level of quality and cost enjoyed by themselves. In early 1994, deregulation increased further going into the third segment of distribution. Indeed, certain states such as California and Michigan, were either considering or experiencing it. In California the “blue book” proposed a phased implementation of “retail wheeling” beginning in 1996.