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FPL(Florida Power
Limited)
C
ompiled by :
Amogh Gupta
Anup Kaur
Bhupesh Malakar
Japtej Singh
Navendra
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• It can be converted into other forms easily (mechanical, light energy etc.)
In the late 19th century, the concept of “public utility” developed to establish
monopoly supplier of a “vital public service.”(Generation, transmission &
distribution of electricity) such that in exchange for the monopoly right to supply
electricity, power companies agreed to let government agencies regulate their
prices and returns.
Timeline:
• National Energy Policy Act (NEPA, 1992): This act required utilities to
make their transmission systems available to third party users at the same
quality and cost enjoyed by the utilities themselves. Shortly after NEPA took
effect, legal disputes arose over transmission access.
1925: Florida Power & Light Company (FP&L), FPL Group’s major subsidiary
was formed through the consolidation of numerous electric and gas companies.
The Company enjoyed steady growth until 1970s when rising fuel costs and
construction over-runs reduced its profitability. Also FPL began facing problems
of frequent power outages and customer complaints about service.
Over the next several years, FPL made four major acquisitions:
Also FPL established a real estate development subsidiary called Alandco and an
alternative energy development subsidiary called ESI energy.
• In 1986, the Nuclear Regulatory Commission put its Turkey Point nuclear
plant on its watch list for safety concerns.
• Demand was growing faster than expected in late 1980s
• Colonial Penn had lost more than $250 million since being acquired
The Broadhead Era: James Broadhead was hired as Chairman in 1989 to address
above mentioned problems as well as growing competition level. He developed a
long term strategic plan involving regular employee interaction. Various steps in
the process were:
As a result by 1994, FPL became the largest utility in Florida, providing power to
3.4 million customer accounts.
• More and more states were opting for “retail wheeling.” If and when Florida
regulators authorized retail wheeling, FPL would have many potential
competitors.
• Standard & Poor’s Rating Group (S&P) changed its guidelines for
evaluating investor owned electric utilities in October 1993 according to
changing competitive landscape. It placed FPL in top 10% of investor
owned utilities and also improved FPL’s debt ratings.
• As there was a 140 basis points increase in long term interest rates since
September 1993, FPL’s interest expenses were mounting. During this period
(from September 1993 to May 1994), FPL’s stock price had fallen by 19.6%
while S&P’s Electric Utilities Index had fallen by 22.1%
• FPL, like most utilities was a low beta stock, over the prior year, its beta was
0.60
As described above lot of things are happening in FPL as well as in the utility
Industry as a whole. We are in the shoes of Stark i.e. electric utilities analyst and
suppose to give a decision on the FPL stock taking all the above factors into
consideration.
Dividend Fundamentals:
There are three main factors that may influence a firm's dividend decision:
• Free-cash flow
• Dividend clienteles
• Information signaling
Under this theory, the dividend decision is very simple. The firm simply pays out,
as dividends, any cash that is surplus after it invests in all available positive net
present value projects.
Dividend clienteles
A particular pattern of dividend payments may suit one type of stock holder more
than another. A retiree may prefer to invest in a firm that provides a consistently
high dividend yield, whereas a person with a high income from employment may
prefer to avoid dividends due to their high marginal tax rate on income. If
clienteles exist for particular patterns of dividend payments, a firm may be able to
maximize its stock price and minimize its cost of capital by catering to a particular
clientele. This model may help to explain the relatively consistent dividend
policies followed by most listed companies.
Information signaling:
A model developed by Merton Miller and Kevin Rock in 1985 suggests that
dividend announcements convey information to investors regarding the firm's
future prospects.
Dividend Policy
Factors Affecting Dividend Policy:
1. External Factors
2. Internal Factors
3) Legal Restrictions:
4) Contractual Restrictions:
5) Liquidity position
1) Reduce the dividend by 32% from $2.48 to 1.68 per share which will improve
cash flow by approx $145 million.
4) Move the dividend review from the annual meeting in May to Feb in order to
link the dividend and annual earnings announcements more closely.
4. Factors of Dividend Cut
The two reasons that led FPL to cut its dividend were:
• The recent speed of deregulation in the utilities industry that forced FPL to
start thinking about the impact of not being a regulated company.
• The fact that the dividend payout had grown to a higher than normal level
on a historical basis.
• Impact of retail wheeling in electric utility industry and how FPL will deal
with it.
• FPL Group must reconcile the increasing level of industry competition with
its dividend payout policy. The dividend payout decision implicates FPL’s
past, present, and future and FPL must reach a decision that is consistent
with its goals in all three.
Some Assumptions:
As in the case it is mentioned that the dividend is going to be in the range of 60-
65% and in the year 1994 it reduced to 61.4%* .Assuming for the future years the
same payout ratio of 61.04%.
We get the following graphs for DPS (dividend per share) & EPS (earnings per
share)
*61.04% is assumed taking the worst case scenario for future years.
DPS
3
1 DPS
0.5
0
89 90 91 92 93 94 95 96 97 98
Year
Figure 1
EPS
4
3.5
3.27 3.37
3 2.99 3.11
2.96
2.64 2.66 2.65 2.76 2.75
2.5
2
P
S
E
1.5 EPS
1
0.5
0
89 90 91 92 93 94 95 96 97 98
Year
Figure 2
Final Recommendations:
Based on the following graphs and future growth prospects of the company
following recommendations are suggested for the stock.
As from the graphs it is clearly visible that this is an Income stock i.e. a stock with
stable dividends.
Retired people, pension funds, and university endowments usually demand high
dividend so if the payout ratio is decreased individual shareholder may prefer to
sell their shares and invest in other high yielding securities or in shares of other
utilities which are more profitable.
But since the declaration of the new dividend scheme FPL’s stock price has fallen
by 13.7% so the investors should hold this security in spite of selling it as in case
of sale it will result in high capital losses, moreover the company’s announcement
to repurchase the 10 million common shares in next three years and at least 4
millions in next 12 months will help to offset the fall in price to some extent, as
buy back of shares indicate that the company feels that its stock is undervalued and
also indicates that the firm anticipates high growth opportunities in future.
High payout ratio means low funds for investment by decreasing this ratio FPL can
retain a higher proportion of funds. As per the CEO’s statement the retained
amount will be used to repurchase the shares from the market, to reduce the debt
level. This will lead to overall strengthening of company’s financial position and
moreover these funds can also be invested in other growth oriented projects or can
be kept aside as a safeguard to competition.
Conclusion:
Case highlights the trade-off between short-run and long-run share price
maximization.