...Jin Ruixue Xu Shu Li Yifan Wu Class Session: MWF 1:50-2:45 PM Case 1: Dividend Policy at FPL Group Inc. Because of FPL’s reluctance to increase its dividends and increased competition in the electric utility industry, Merrill Lynch’s utility analyst downgraded FPL Group Inc. Kate Stark, utility analyst at First Securities Corporation, wondered whether she should issue an updated report about stocks of FPL. We investigated the potential risks faced by FPL and its payout policies, and according to the results, we recommend the shareholders to hold FPL’s stocks. Based on our analysis, there are several important issues confronting the FPL Group in May 1994. The first one is the potential competitors and losses resulting from retail wheeling. Although Florida does not consider a retail wheeling proposal now, retail wheeling is still a threat because of the general trend of the industry. FPL needs to ensure that it has the ability to compete with other companies both in and out of state. Also, negotiations between FPL and Florida Municipal Power Agency are still continuing. Florida Municipal Power Agency accused FPL of violating the NEPA of 1992 by charging excessive rates and denying access to its utility transmission system. FPL is also concerned with the increased long-term interest rates which will result in a larger interest expense accompanied by underperformance. Due to the relatively high levels of debt, FPL could not pass all interest increases to customers. FPL’s stock price...
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...Case Analysis - FPL Energy FPL Energy is one of the nation’s leading independent generators of electricity. Dedicated to generating clean energy, 80 % of its capacity is fueled by clean and renewable resources. The United States is the nation with the largest generator of wind energy, and it operates the two largest solar fields in the world. FPL Group, with annual revenues of more than $8 billion, is one of the nation's largest providers of electricity-related services. Its principal subsidiary, Florida Power & Light Company, serves approximately 3.9 million customer accounts in Florida. FPL Energy, LLC, and FPL Group energy-generating subsidiary, is a leader in producing electricity from clean and renewable fuels. 2. Historical Overview FPL Group is a far different company today than the one Jim Broadhead joined in January of 1989 when he became president and chief executive officer. FPL Group was then engaged in a number of businesses unrelated to its core electric skills, including insurance and financial services, real estate, cable television, and agriculture. The company's principal subsidiary, Florida Power and Light, was considered a well-managed utility with an emphasis on quality. However, the utility's spiraling costs had resulted in electric rates among the highest in the Southeast. Today, FPL Group is nationally known as a high quality, efficient, and customer-driven organization focused on energy-related products and services. With a growing...
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...Group Assignment 4 Dividend Policy at FPL Group, Inc. 1. Why do firms pay dividend? What, in general, are the advantages and disadvantages of paying cash dividends? The sole purpose of dividends per se is to return wealth back to the shareholders of a company. Shareholders take risk and invest in company and the dividends are rewards for commitment, trust and risk-taking. Dividends transfer economic value from the company to the shareholders instead of the company using the money for operations. Often in case of more established and mature companies that are growing more slowly they are not “hungry” for cash and to reward the shareholders by sharing the wealth those companies pay dividends. Similarly paying dividends often is a sign of sound business model and stability of company at large. Both paying and not paying dividends and cash dividends have their own respective pros and cons as presented below: Advantages: 1. Dividends may appeal to investors who desire stable cash flow but do not want to incur the transaction costs from periodically selling shares of stock. 2. Behavioral finance argues that investors with limited self-control can meet current consumption needs with high dividend stocks while adhering to the policy of never dipping into principal. 3. Managers, acting on behalf of stockholders, can pay dividends in order to keep cash from bondholders. 4. The board of directors, acting on behalf of stockholders, can use dividends to reduce the cash available...
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...Dividend Policy at FPL Group, Inc. FPL Group, Inc., the Florida's largest electric utility company, after 47 years of uninterrupted increase in dividends, was considering cut dividends in 1994. How would this unusual move affect FPL and the investors? Meanwhile, what would Kate Stark, the analyst at the Equity Securities Corporation, recommend regarding investment in FPL's stock - buy, sell, or hold? 1. Current Dividend Policy at FPL • FPL’s current payout ratio = Dividend per Share/Earning per Share = 2.47/2.30 = 107.4%. (Exhibit 4b) High relative to other utilities (exhibit 9) • Current Dividend Yield = Dividend per Share/Price per Share = 2.47/33=7.5% (Exhibit 4b&Exihit 8) Average level among utilities • Historic Dividend Policy: 1985 through 1993, payout has risen from 62% to 107.4% ；While during the same period, percentage increases in dividends has decreased from 9.6% to 1.6% 2．Why FPL consider cut dividend? • Challenges facing the FPL Group in May 1994: ✓ High pay-out ration will be unsustainable: The advent of retail wheeling threatens to reshape the entire electric utilities industry. It will bring more challenges to FPL. ✓ Low capacity Margin: 8.6% (Exhibit 7) which means FPL has less room in term of growth compared to peers. Need to invest in capacity to deal with the increased competition. ✓ FPL has a large amount of debt, and reducing the dividend could facilitate FPL debt repayment. FPL stock has fallen dramatically...
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...FPL – An OverviewFPL Group, Inc. is Florida’s largest electric utility company. In 1925, through the consolidation of numerous electric and gas companies, they formed Florida Power & Light Company (FP&L). FP&L grew steadily over the next 50 years until rising fuel costs, operating issues, and construction costs began to decrease profitability. In the mid-1980s, FPL diversified with four major acquisitions - Colonial Penn Life Insurance Company, Telesat Cablevision, Inc., CBR Information Group Inc., and Turner Foods Corporation- in order to minimize the potential risk within the utilities industry. To address problems in operations, FPL began a rigorous program of Japanese-inspired quality control. Management succeeded in transforming FPL into a lean operational system resulting in a drop in scheduled downtime from 18% to 4%, while customer complaints also fell by 60%. By 1989, FPL was recognized as “one of the best-managed U.S. corporations.” Despite the progress in quality, FPL was still dealing with problems: Colonial Penn was losing money, there were safety concerns about a particular nuclear plant, and demand was growing faster than capacity. In 1989, James Broadhead succeeded Chairman Marshall McDonald. Broadhead placed an emphasis on commitment to quality and customer service, increasing focus on the utilities industry, expanding capacity, and improving cost positions. He took measures to scale back the intense quality controls while still working to preserve...
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...Dividend Policy at FPL Group, Inc. Executive Summary Florida Power & Light Company was formed in 1925 through the consolidation of numerous electric and gas companies. After enjoying steady growth until the 1970s, FPL began experiencing operating problems and reduced profitability due to factors like rising fuel costs and construction over-runs. To address these problems, Chairman Marshall McDonald decided to diversify into higher growth businesses and guided FPL to make four major acquisitions- Colonial Penn Life Insurance Company, Telesat Cablevision, CBR Information Group Inc. and Turner Foods Corp. FPL Group also established a real estate development subsidiary called Alandco, and an alternative energy subsidiary called ESI Energy. To address complaints from consumers, FPL instituted a quality control program inspired from Japanese methodologies. Despite all these moves, FPL continued to face underlying growth problems due to losses at Colonial Penn business, federal concerns over FPL’s nuclear reactor safety and going overboard with their quality control program. James Broadhead succeeded McDonald in 1989 and started developing a long range strategic plan for FPL. Broadhead simplified the quality control program. He wanted FPL to focus on its core business and made plans to sell several non-utility businesses that the group held. Broadhead started an aggressive capital expenditure program of $6.6 billion for expansion. To cut costs, Broadhead flattened the organization...
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...Dividend Policy at FPL 1. What are the major uses and sources of funds for FPL? • Major Uses – Operating expenses – Capital and nuclear fuel expenditures o In 1994, FPL budgeted $6.6 billion in expansion cap ex over the next five years in order to meet projected demand. Projects included building a new transmission line, refurbishing the oldest generating plant, improving operating efficiency at all plants, and buying a majority share in a coal burning plant owned by The Southern Company – Retirement of long-term debt and preferred stock – Dividends on Common Stock – Acquisitions o From 1985 to 1988, FPL attempted to diversify into higher growth businesses and made four major acquisitions (Colonial Penn Life Insurance, CBR Information Group and Turner Foods Corp) as well as established a real estate development subsidiary (Alandco) and an alternative energy development subsidiary (ESI Energy) • Major Sources – Operating revenues – Divestitures of non core operations o In 1991, FPL sold Colonial Penn o In addition, FPL was trying to sell Telesat Cablevision and Alandco – Issuance of FPL debt, common and preferred stock What is the industry structure and business risk? • Electric Utilities Industry Structure – Regulated industry historically dominated by monopolies and vertically integrated suppliers – Beginning in 1978, deregulation has been weakening the utilities’...
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...1. Why do firms pay dividends? What is general, are the advantages and disadvantages of paying cash dividends? Firms pay dividends based on their finance and investing strategies and decisions. If a firm is looking to finance a project through borrowing the company may want to give cash dividends to its shareholders to reduce the amount of their cash balances on hand. Also dividends are a way to give back to their investors and shareholders. By them receiving the cash dividends they are gaining immediate cash payment to spend in their own way or to reinvest with the company. Also stocks that offer dividends are sometimes more favorable to investors because they know they will be getting routine income from the stock. The advantages of paying cash dividends are based in what signals it gives to the market. If the company is giving out dividends and the dividends increase this is a good signal to the market that the company is doing well and that the stock is on the rise. Also, in times when the stock price decreases but the company continues to pay out the normal dividends it shows the market that the company is not nervous and will rebound back soon. Some disadvantages of paying cash dividends are that it can also give bad signals to the market. If dividends decrease it can signal to the market that the company is not doing well and the value of the stock will decrease. From this signal investors and shareholders might sell the stock, further driving down the stock price of...
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...FPL Case Report FPL Group, Florida’s largest electric utility company, announced to cut its dividend for the first time in 47 years in 1994 has shocked the public. An analyst named Kate Stark was frustrating about whether she should revise her advice about her current “hold” recommendation on FPL’s stock. Another critical issue FPL facing is that whether or not to change its current pay out ratio based on the growing competitiveness in the utility industry. According to course notes and the textbook, dividends are a share of a company’s profits distributed to shareholders. Shareholders are the owners of the firm and dividends are their share of the firm’s profits. The advantage of paying dividends is that the dividend signals the firm’s financial stability. Paying dividends not only encourage current shareholders to retain their investment in the firm, but also increase the firm’s attractiveness to potential investor. The disadvantage of paying dividends is that the firm loss opportunities of further growing by having less liquid cash in hands. Paying a cash dividend may reflect the firm’s current success, but it weakens the firm’s ability to expand. The firm may decide to pay dividends later or reduce dividends amount to get the growth opportunity. Another disadvantage of paying cash dividends would be they are not tax deductible. There are two reasons for FPL’s dividends cut. First is because of the recent deregulation trend in the utility industry and second is the fact...
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...Question 1 - Should Ms. Stark Revise her recommendation to her clients? Ms Stark currently has a HOLD recommendation on the FPL stock. Such a recommendation was developed on the analysis of the company’s fundamentals and on the forecasted future cash flows that the company will generate in the following years. As an equity research analyst, Ms Stark must have considered all the factors that can impact future cash flows and has provided a medium to long term price target and corresponding HOLD recommendation. Based on the financial data available in the exhibits, FPL is not facing any financial trouble, in fact, when looking at the financial projections for the next five years, it is clear that analysts expect an increase in revenues coupled with a reduction of capital expenditures which will lower the cash need for the following years. Accordingly, the change in the pay-out ratio is not a decision made to secure the financial survival of the company and therefore should not affect the enterprise and equity value. In fact, the financial projections already include the real factors that could affect future cash flows and equity value: (i) retail wheeling, (ii) litigations, or (iii) higher interest expenses which are relevant to the future and might negatively impact the company. In conclusion, Ms Stark should maintain the recommendation on HOLD, and base this decision on the fundamentals of the company rather than on the short term price movements due to rumors on possible...
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...Discussion Questions 1. What are the most important issues confronting the FPL Group in May 1994? 2. What is the current payout ratio and dividend yield for FPL and how does this compare to other firms in the electric utility industry? 3. What is FPL’s competitive position Vis a Vis other electric utilities in terms of costs and revenues? 4. What changes is Broadhead making? 5. According to signaling theory, what would the right dividend decision be? Analysis Questions 1. What is the nature of FPL’s historical dividend policy? 2. How does the DPS compare to its EPS? 3. Estimate the Lintner model of dividend policy based on historical data. Make a reasonable assumption about the target payout ratio and estimate FPL’s dividend adjustment growth rate. Lintner's Model A model stating that dividend policy has two parameters: (1) the target payout ratio and (2) the speed at which current dividends adjust to the target. | | In 1956 John Lintner developed this theory based on two important things that he observed about dividend policy: 1) Companies tend to set long-run target dividends-to-earnings ratios according to the amount of positive net-present-value (NPV) projects they have available. 2) Earnings increases are not always sustainable. As a result, dividend policy is not changed until managers can see that new earnings levels are sustainable. | iv) Use your estimates from the Lintner model to simulate the effect on future...
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...of the case studies. At the beginning of term, student groups will be randomly assigned to one of the following two cases: “Valuation of AirThread Connections” or “Dividend Policy at FPL Group, Inc.” Please find out which case you have been allocated to and the week in which that case is discussed. In the following I explain which deadlines you have to meet and how effort towards each deadline contributes to your coursework mark: • Deadline 1. You must read up your case material and prepare oral answers to the case questions by the Thursday lecture to which your case discussion is allocated. Groups that have not prepared before the case discussion will suffer a coursework mark penalty. The penalty will be 10 points of the coursework mark (e.g., a drop from 60% on your submission to 50% overall). Groups that have fully prepared and present their arguments during the class discussion in a lively and enthusiastic way will receive a 5-point coursework mark uplift (e.g., an increase from 70% to 75%). • Deadline 2. The next deadline is for submission of your complete case report. This must be done on Moodle, by the Thursday one week after the case discussion week. Therefore, the deadlines for submitting the written report are as follows: – Groups assigned to the AirThread case: Thursday 27 March – Groups assigned to the FPL case: Thursday 3 April. Advice on how to write the case report Each group will have to prepare a written report for its assigned case. The report should be no longer...
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...that has posted increased dividend returns over the last 47 years. The average return from 1984-1993 is $ 2.20. In the previous three weeks FP&L stock was issued a “hold” recommendation by Ms. Stark based on the assumption that its dividend payout would either increase, or remain at $ 2.48. Today however, Merrill Lynch downgraded FP&L stock based on management’s concern with excessive pricing of stock in an industry facing increasing risk. As a consequence the stock dropped by 6% and now Kate must decide to keep the original “hold” recommendation or to make a revision to “buy,” or “sell.” Discussion FPL is currently unprepared for the final stages of electric deregulation. A possible solution for FP&L to remain competitive is to grow out of its payout ratio by slowing the dividend growth rate to 1% starting in 1995. A 1% growth rate would lower FP&L’s payout ratio as long as the earnings increased faster than the shares. The current payout ratio for 1994 is approximately 107%. Industry average for 24 major companies is 80%. The 1% fixed rate would be beneficial to FP&L because by 1997 the ratio would be at 80% and at 79% by 1998. The net effect would mean more cash flow to handle its operating expenses and maturing debt. Conversely if FPL values the 47 year streak of increasing dividends it will look for other options. If FPL does value the 47 year streak the company may seek to hold its dividend at$ 2.48 or increase it slightly. By holding the dividend at $ 2.48 FP&L could have...
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...Table of Content i 1 The Porsche Takeover 1 2 FPL Case 3 2.1 Expected Reaction of Stock Price 3 2.1.1 The Modigliani/Miller Theorem 3 2.1.2 The Tax Theory of Dividends 4 2.1.3 The Signaling Theory of Dividends 5 2.1.4 Agency Costs 5 2.1.5 Theory of Dividends Based on Tax Clienteles 6 2.2 Chart in the Light of Previous Theories 7 3 Elton and Gruber (1970): “Marginal Stock Holders tax Rates and the Clientele effect”, Review of Economics and Statistics 52, p. 68-74 8 3.1 Investors’ Marginal Tax Rate 8 3.2 Ex-Dividend Price Decline 8 3.3 Equal Tax Rates 9 4 Reference List 9 Allen, F., Bernardo, A.E., & Welch, I. (2000). A theory of dividends based on tax 9 clienteles. The Journal of Finance, 55(6), S. 2499-2536 9 * The Porsche Takeover To answer the question it has to be distinguished between common stocks (ordinary shares) and preferred stocks: Common stock (ordinary stock) can be defined as a “security representing ownership of a corporation” (Brealey, Myers, & Allen, 2011, p. 913). In this context ownership means “the right to the cash flows and the right to take all financing, and investment decisions, and full cash flow and full control rights”. Preferred stock on the other hand can be defined as a “stock that takes priority over common stock in regard to dividends. Dividends may not be paid on common stocks unless dividend is paid on all preferred stocks. The dividend rate on preferred stock is usually fixed at time of...
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...peer evaluation report by the end of the course. You should use the form to outline each team member’s contribution (excluding your own). Failure to submit an evaluation will result in a penalty of your overall grade. Case #1: Financial Institutions/Intermediaries; Corporate Governance “The Role of Capital Market Intermediaries in the Dot-Com Crash of 2000” Case #2: Valuation “Mercury Athletic Footwear: Valuing the Opportunity” Case #3: Capital Budgeting “Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies” Case #4: Cost of Capital “Lex Service PLC - Cost of Capital” Case #5: Dividend Policy “Dividend Policy at FPL Group, Inc....
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