Subject:Dividend Policy at FPL Group, Inc.
Problem:Should Kate Stark revise her current investment recommendation of “hold” on FPL’s stock to her clients? Options:1) To change her “hold” recommendation to a “buy” recommendation
2) To change her “hold” recommendation to a “sell” recommendation
3) Remain unchanged; continue with the “hold” recommendation Recommendation:
Table of Contents
In 1994, Merrill Lynch published a report that disclosed the change in their investment rating for the FPL Group, Inc.. They had downgraded this rating as they expected the directors would choose not to raise the annual dividend. This also happened to be the first time in 47 years that the FPL Group had not raised dividends. This tweaked the interest of a certain electric utilities analyst at the First Equity Securities Corporation, Kate Stark. She now was faced with the decision whether or not to amend her own recommendation of “hold” on FPL Group, Inc.’s stock (her recommendation of hold was based on the assumption that FPL will keep its dividend at $2.48 per share, or increase this slightly). James Broadheld, chairman of the FPL Group, understood the issues of an ever changing marketplace, and knew that the industry was on the verge of being deregulated, and thus implemented a strategy that focused primarily on a strong commitment to quality as well as customer service, while focusing on the utilities industry and expanding capacity in order to improve its own cost position. He believed that this approach to business would result in a future of “full and open” competition amongst all competitors. As a result, as of May 1994, the FPL Group was faced with a critical question – to decrease their dividend payout ratio or not? Prior to Broadheld’s entry to FPL, chairman Marshall McDonald expanded the types of industries FPL were involved in during the 70’s and 80’s, leading to...