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Dividend Policy at Fpl Group Inc.

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Baocheng Wei Jieqing Jin Ruixue Xu Shu Li Yifan Wu Class Session: MWF 1:50-2:45 PM Case 1: Dividend Policy at FPL Group Inc. Because of FPL’s reluctance to increase its dividends and increased competition in the electric utility industry, Merrill Lynch’s utility analyst downgraded FPL Group Inc. Kate Stark, utility analyst at First Securities Corporation, wondered whether she should issue an updated report about stocks of FPL. We investigated the potential risks faced by FPL and its payout policies, and according to the results, we recommend the shareholders to hold FPL’s stocks. Based on our analysis, there are several important issues confronting the FPL Group in May 1994. The first one is the potential competitors and losses resulting from retail wheeling. Although Florida does not consider a retail wheeling proposal now, retail wheeling is still a threat because of the general trend of the industry. FPL needs to ensure that it has the ability to compete with other companies both in and out of state. Also, negotiations between FPL and Florida Municipal Power Agency are still continuing. Florida Municipal Power Agency accused FPL of violating the NEPA of 1992 by charging excessive rates and denying access to its utility transmission system. FPL is also concerned with the increased long-term interest rates which will result in a larger interest expense accompanied by underperformance. Due to the relatively high levels of debt, FPL could not pass all interest increases to customers. FPL’s stock price has fallen 19.6% while the S&P Electric Utilities Index has fallen 22.1% from September 1993 to May 1994. Now FPL must decide whether to increase, hold, or reduce their dividends. FPL has a high dividend payout ratio currently which may lead to a lack of cash to reinvest and to prepare for future competitors. Additionally, FPL has some of the highest costs in the…...

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