Florida Power & Light Case Study - Dividend Policy
Dividend Policy at FPL Group Inc.
Problem: On May 5, 1994 the utilities analyst of Merrill Lynch downgraded FPL Group Inc. due to an expectation of adjustment in dividend payments. The report also acknowledged the probability of a cut in the dividend. Kate Stark of First Equity Securities Corporation analyzes the situation and she has to predict what is going to happen. This investment alert was published dropped the stock price by 6% on the same day. 3 weeks ago Kate Stark has recommended a “hold” position for FPL Group. With the new report should she change her recommendation?
Electric Utility Industry: The electric utility industry is formed by three segments: generation, transmission and distribution. Securities and Exchange Commission (SEC) is the regulating authority for the utilities with interstate systems or substantial investments in assets not related to the core operation of the utility. In order to avoid SEC supervision, the industry had evolved into a large number of intrastate, and relatively undiversified, utility companies operating under extensive regulation.
Public Utilities Regulatory Policies Act (PURPA) encourages the creation of plants using renewable/non-traditional energy sources and gives Federal Energy Regulatory Commission the regulatory power. These plants were classified as “qualifying facilities” and local utilities were required to buy all of the electricity produced by these qualifying facilities. Once deregulation is introduced, FPL Group will not be very affected by increased competition in the generation segment because of the previous investments in these qualifying facilities.
Deregulation: In the 1970s and 1980s deregulation eliminated the monopoly rights in industries such as trucking, airlines, banking and communications. In the 1990s ideas about deregulating the electricity utilities were floating around. Deregulation brings increased competition and short term costs in terms of layoffs and business failures while
Problem: On May 5, 1994 the utilities analyst of Merrill Lynch downgraded FPL Group Inc. due to an expectation of adjustment in dividend payments. The report also acknowledged the probability of a cut in the dividend. Kate Stark of First Equity Securities Corporation analyzes the situation and she has to predict what is going to happen. This investment alert was published dropped the stock price by 6% on the same day. 3 weeks ago Kate Stark has recommended a “hold” position for FPL Group. With the new report should she change her recommendation?
Electric Utility Industry: The electric utility industry is formed by three segments: generation, transmission and distribution. Securities and Exchange Commission (SEC) is the regulating authority for the utilities with interstate systems or substantial investments in assets not related to the core operation of the utility. In order to avoid SEC supervision, the industry had evolved into a large number of intrastate, and relatively undiversified, utility companies operating under extensive regulation.
Public Utilities Regulatory Policies Act (PURPA) encourages the creation of plants using renewable/non-traditional energy sources and gives Federal Energy Regulatory Commission the regulatory power. These plants were classified as “qualifying facilities” and local utilities were required to buy all of the electricity produced by these qualifying facilities. Once deregulation is introduced, FPL Group will not be very affected by increased competition in the generation segment because of the previous investments in these qualifying facilities.
Deregulation: In the 1970s and 1980s deregulation eliminated the monopoly rights in industries such as trucking, airlines, banking and communications. In the 1990s ideas about deregulating the electricity utilities were floating around. Deregulation brings increased competition and short term costs in terms of layoffs and business failures while