Essay on Connect

1742 Words Apr 5th, 2014 7 Pages
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.
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If and when Florida regulators authorized retail wheeling, FPL would have many potential competitors. Based on these major events, S&P revised the ratings of FPL. Merrill Lynch utilities analyst was downgrading FPL Group due to the expectation that the FPL Directors will not choose to raise the annual dividend and were considering reviewing their dividend policy. FPL Management believed that the dividend payout ratio was high given the risks facing the industry. Kate Stark, the electric utilities analyst at First Equity Securities Corporation, was contemplating how to revise her recommendation for FPL given the recent 6% drop in share price and proposed change in dividend policy.

1. Why do firms pay dividends? What, in general, are the advantages and disadvantages of paying cash dividends?
Taking into account the many theories of dividend policy including the Dividend Irrelevance Theorem, the Information Effect, The Clientele Effect and Corporate Control Issues, firms should pay out as dividends “any cash flow that is surplus after the firm has invested in all available positive net present value projects.”[i] In some cases, this may be a way of showing that the company is financially stable and capable of fulfilling dividend obligations. It may also be a way for companies to mitigate agency problems when they have excess cash.

Advantages of paying cash dividends include: • A signal of the value and stability of the business • A means of distributing

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