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Financial Management - I
Group 11
Kinnari 20121026 | Krutika P 20121028 | Tushar 20121058 | Vijay 20121062
Agenda
Financial Analysis
Reflection and conclusion
Case Backgound
Synopsis
Current Situation
Case Description
Competitive Position
Recommendation
When the California regulators released their retail wheeling proposal, the three largest utilities in the state lost a combined $1.8 billion in market value.
S&P Electric Utilities Index has declined more than 20% since September 1993. While much of this can be attributed to the increase in interest rates, some portion of the decline is due to the effects of deregulation.
Possible Alternatives
Cut dividend
Key Assumptions
Efficient Market Hypothesis apply Analysts investment rating are limited to 3 options Buy Sell Hold Signaling exists in market place
Decision Rationale
FPLs customer mix is also a competitive advantage since industrial sales represent only 4% of total sales compared to an average of 21% for the others.
According to the retail wheeling proposals, having a low percentage of industrial customers limits FPLs risk to the threat of competition. S&P ranked FPLs competitive position among the top 10% of investor-owned utilities.
This strong future cash flow makes it unlikely that FPL will cut its dividend. Indeed, according to the analyst, FPL views earnings growth as a possible solution to the high payout ratio problem.
Because the competitors currently have excess generating capacity (capacity margins) and sufficient transmission capacity for the next several years, they pose a serious threat to FPLs future profitability.
Financial Analysis
Does signaling play a role in FPLs dividend policy What FPL tries to signal? Better? Or worse? Improved competitive edge and financial strength increase dividend.
Non-tax paying institutions (36%) generally dont care whichever capital gains or dividends. For individuals (52%), between 1986 and 1993, they were taxed at same rates. More recently, tax codes favor capital gains: the tax rate on long-term capital gains peaks at 28% while the rate on dividend income can go as high as 39% for high income individuals. The fact that FPL has a relatively high dividend yield would seem to indicate that the tax disadvantage of dividends does not concern its investors.
Transactions Costs
One can see that operating cash flows were approximately equal to investing cash flows; long term debt issuance was approximately equal to debt retirement; and stock issuance was approximately equal to the payment of common dividends. The investment banking fees for the issuances, estimated at 3% of the total amount issued, would equal $60 million. As a general rule, a firm should not issue equity to pay dividends because it results in a deadweight loss for investors.
Agency costs
Managers own only 0.1% of stock. Firm is to ratify a new executive compensation plan, which will emphasize net income and reduce the extent to which bonuses are paid in stock. agency conflict If Broadhead were to pursue new ways to increase net income, he might well reduce the dividend. FPL could simply invest the $150 million of savings from cutting the dividend at 5% to yield $7.5 million per year. This extra income would increase net income by 1%significant in an industry that is growing at only 2% per year.
What Will Broadhead do? May 9: FPL announces new financial strategy
32% reduction in quarterly dividend Dividend payout targeted at 60-65% Repurchase 10 million shares over 3 years Reduce debt levels Move annual dividend announcement to February
Broadheads explanation for the cut that the firm needs more financial flexibility to deal with future competition. For electric utilities industry which generate large amounts of free cash flow, financial slack may not be such a good thing. Stock price falls by $4.375 to $27.50 [down 13.7%], Stock price is down 22.3% since April 29
Financial Management I | Dividend Policy at FPL Group Inc.
Reflection
It is our reflection that FPL reduce its payout ratio to 60%, because this reduced payout ratio would give better positioning FPL for future performance and growth in a recently deregulated industry.
Additionally, reducing the pay-out ratio reduces taxes for their shareholders.
Buy back shares subsequent to dividend cut, o In order to counteract negative market reaction to dividend cut. o Make firm less of a target for acquisition.