Fpl Case Essay

Submitted By dukeus89
Words: 791
Pages: 4
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Fin 4422
6/9/13
Buy, Sell, or Hold FPL Shares?

Dividend Policy of FPL Group’s case is about if investors should buy, sell, or hold the decreasing shares of FPL stock. Florida Power & Light (FPL) is one of the largest electrical companies in the United States. An analyst from Merrill Lynch downgraded the FPL stock after months of decreasing share price. On May 5th 1994, Florida Power & Lights’ stock price fell by 6 per cent after that analysis. From September of 1993 to May of 1994 the price has decreased by 19.6 per cent. Income investors and growth investors are the two ways that people like to invest. Companies like FPL pay a portion of earnings back to their shareholders in the form of dividends. Income investors are highly affected by the dividend return on utility stocks. It is believed that the FPL dividend and the dividend payout ratio is too high compared to similar companies. Three alternatives for FPL would be to cut, increase, or keep the dividend price of $2.48. The fluctuation of a dividend price is really risky though. Two examples were given in the case that showed what could happen if a company decides to cut the dividend. I believe shareholders should keep a hold on the stock because the company hasn’t made any decisions as to what they plan to do.

In order to understand why investors should hold their shares of FPL stock, we need to understand what dividends are. A dividend is a percentage of net income that is given directly to the shareholders. Dividends are a great way to attract new shareholders and retain current ones. High dividends tend to attract income investors who are looking to receive steady cash. Investors can then invest in something else or just use the money to put back into the economy. The other type of investor is called a growth investor. They tend to focus on stocks with long term capital appreciation. The company will then grow and hopefully the price of the stock will rise also. The problem is that FPL’s stock has been on the decline. An analyst from Merrill Lynch projected the company to drop off and the stock dropped another 6 per cent. Management is blaming the dividends but would altering them really help?

The three ways to affect a dividend are decrease, increase, and hold. That is the big debate that FPL has gotten into. In 1994 dividends were at $2.48 with over 90 per cent of a payout. Utility companies tend to have a high payout but the rest of the companies were only in the 70’s. Management thinks that FPL should cut back on their payout ratio by around 30 per cent. That would be great but the company doesn’t have much room to expand. FPL only has an 8.6 per cent capacity margin which doesn’t give them much room for internal growth. Also, companies such as Consolidated Edison Company of New York and Sierra Pacific resources tried to lower dividends and they got into major trouble financially. Lowering dividends is portrayed by shareholders as a
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