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Dividend Policy at Florida Power and Light FPL
Dividend Policy at Florida Power and Light FPL
Dividend Policy at Florida Power and Light FPL
Presented by:
Dominic A. Labitzky
Electric Utility Industry
The concept of a public utility developed in the late 19th century to refer
to a monopoly supplier of a vital public service. The public service in this
case is 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 1935 the Federal Power Act gave the Federal Power Commission the
authority to oversee wholesale transactions (sales) of electricity to utilities
rather than to consumers.
Congress also passed the Public Utilities Holding Company Act (PUHCA)
which gave the Securities and Exchange Commission the authority to
regulate the utilities with inter-state systems or substantial investments in
assets not related to electricity.
Consequently, the industry evolved into a large number of intra-state,
and relatively un-diversified, utility companies operating under extensive
Federal and State regulation.
Rise of Deregulation
In 1978 Congress passed The Utilities Regulatory Policies Act. The act
required local utilities to buy all their electrical output.
Over time, the other major customer segments, commercial users and
eventually residential users would get the right to pick their electricity
suppliers.
Effects of Deregulation
As of 1993 FPL Group, Inc.s dividend payout ratio was 91%. A level
significantly higher than the average of its peers.
It is clear that the current payout ratio of 91% is too high. For FPL
Group, Inc. lowering the pay out ratio to a lower value would be more
appropriate. The lower payout ratio would provide the firm with much
needed capital in the form of retained earnings. Stay Tuned
The firm could use this capital to expand and grow the company as
well as improve the firms capital structure. As stated in the case, the
debt rating of FPL has been upgraded. This should make their cost of
debt decrease. FPL can now pay off their high cost debt and use the
savings created by the lower dividend to obtain debt at a lower cost if
they so choose.
A lower payout ratio is advantageous for Investors
First we must consider who the FPL investor is!
(as shown in table 10)
Individuals 51.9%
Institutions 36.9%
ESOP 11.1%
=> IGR = (ROA * b) / (1 ROA * b) = (.0393 * .09) / (1 - .0393 * .09) = .0035 or .35%
Obviously, the firm depends on outside sources of financing!
=> IGR = (ROA * b) / (1 ROA * b) = (.0393 * .35) / (1 - .0393 * .35) = .014 or 1.4%
The firm depends on outside sources of financing but its ability to grow from
with in is increased by 400%!
With net income of $514 million (1993) the current plowback ratio
translates into $46.26 million of retained earnings. With a reduced
dividend payout ratio leading to a higher plowback ratio the resulting
increase to the firms retained earnings is roughly $134 million.
NI = $514 million
At a 9% plowback ratio: $514 million * 9% = $46.26 million
At a 35% plowback ratio: $514 million * 35% = $179.90 million
$179.90 million
-$ 46.26 million
_____________
$133.64 million => roughly $134 million
Analyst perspective and recommendations
As analyst we would like to see a reduction in FPLs dividend payout
ratio. In this new competitive environment we feel that FPL would be
better served with a lower dividend payout ratio because it makes no
sense to have a high payout ratio in a growth industry.
We do realize that initially the company could see a short term decline
in stock price from a dividend cut however, we would expect the long
term outlook of the company to be in a better competitive position
giving way to growth and eventually a rise in the stock price.
Under the scenario where FPL cuts its dividends we would recommend
a Buy rating. Since the Price of FPL has fallen by more than 6% we feel
the stock is a good value at this time.
The End