Case ID: 295059
Solution ID: 4935
Words: 2277
Price $ 75

Dividend Policy at FPL Group Inc A

Case Solution

FPL group is a utility company that has been operating in Florida as a monopoly. As part of its deregulation programs, the United States government is considering a deregulation of the utility industry. Such deregulation has already started in other states like California, and the affected utility companies have realized significant losses because of increased competition. FPL is considering a decrease in its dividend payout ratio in order to conserve resources in the wake of a possible deregulation and changing industry landscape. It is determined that the company can either decrease its dividend payout over time by maintaining a constant dividend or effect a swift decrease in dividend payout by making an immediate dividend cut. Although MM model dictates that dividend policy in irrelevant, the dividend cut might accompany a decrease in share price because of the strong clientele and signaling effect in the utility industry. Moreover, it is believed that the current stock price assumes a strong dividend growth rate, which might not materialize in the adverse industry climate. Therefore, Kate Stark, the analyst following FPL Group, should issue a sell recommendation on the stock.

Excel Calculations

Calculation of Cash Flow Avaiable to Equity Holders (1994-1998)

Analysis of Different Dividend Policies

Scenario 1: No Dividend Cut & Dividend Grows at 2%

Dividend Growth Rate,Currect Dividend,Forecast Dividend Per Share,,Total Forecast Dividend,Payout Ratio,Dividend to FCFE Ratio,Additional Financing Needed

Scenario 2: No Dividend Cut & No Dividend Growth

Forecast Dividend Per Share,,Total Forecast Dividend,Payout Ratio,Dividend to FCFE Ratio,Additional Financing Needed

Scenario 3: 20% Dividend Cut & Dividend Grows at 5%:

Dividend Growth Rate,Currect Dividend,Forecast Dividend Per Share,,Total Forecast Dividend,Payout Ratio,Dividend to FCFE Ratio,Additional Financing Needed

Questions Covered

Executive Summary

Introduction

Industry Environment and Dividend Preferences

Analysis of Dividend Policy

Scenario 1: Continued Dividend Growth

Scenario 2: Stable Dividends

Scenario 3: Dividend Cut

Predicting the Price Changes

Recommendation