Tarun Aswani

FPL Case Review

The investment rating of FPL has recently been downgraded after talks of cutting
dividends for the first time in 47 years were announced. This was due to a streamlining
of its businesses and a new commitment to quality and customer service that would
come from focusing on the utilities industry. Furthermore, this potential decrease in the
dividend payout ratio would be a result in an evolving competitive market place. FPL
has less room o grow than competitors as suggesting by the capacity margin of 8.6%. It
is recommended that FPL should reduce their payout ratio to 60%. This lower ratio
would put FPL in a better position in the future to grow at a faster rate than their
competitors as this industry has recently been deregulated.
In this scenario there are advantages and disadvantages to weigh in on. In
terms of shareholders, this reduction in the payout ratio would reduce the taxes paid as
dividends are taxed more than capital gains. In terms of the company, the firm will be
able to retain more of their earnings instead of paying them out in the form of dividend.
Furthermore, FPLs divined policy is too high at 90%. A reduction in the payout ratio
held to reduce this exposure to increased industry risk, including market volatility and
deregulation. In terms of disadvantages there will be a negative market reaction to this
reduction. This is because this lower dividend police will be a signal to the market and
in turn, the stock price will be lowered.
In closing, the new deregulation of this industry has result in new competition.
Within this new market environment, FPs divined policy is much too high. It is
suggested that FPL must reduce its payout ratio to around 60%. This reduction would
place FPL on the lower range in terms of their peers. This would place FPL is better
positioning for future performance and growth. Management should revise their
investment recommendations from a hold position to that of a buy. Also the lower value
reflected by the decreased payout ratio is the result of the effect of signaling to the
market