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Dividend Policy at Fpl Group

Essay by   •  June 14, 2012  •  Case Study  •  868 Words (4 Pages)  •  1,831 Views

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Dividend Policy at FPL Group

Investment advisor Kate Stark received an alert that Merrill Lynch's utilities analyst was downgrading FPL Group Inc. Only three weeks earlier, she issued a report on FPL group with a "hold" recommendation based on her assumption of a stable dividend or slight increase. As a result of the downgrade, FPL stock price immediately fell 6% and investors have begun to speculate a dividend stall or cut. She is wondering what, if anything she should say to her clients regarding FPL's stock and whether she should issue an updated report.

Florida Power and Light is the largest utility company in the state of Florida. Florida Power and light started in 1925 through the consolidation of many Florida based power companies. Growth continued until the 1970's, when rising fuel costs and construction cost over runs reduced its profitability. At the same time FPL began experiencing problems with frequent power outages and customer complaints in service. Though FPL did not feel the effects right away, it faced the future possibility of threat entrants into the market due to the deregulation. In response to this threat, Chairman Marshall McDonald decided to diversify FPL by venturing out into other businesses. It acquired, Colonial Penn Life Insurance Co, Telesat Cablevision, CBR Information Group Inc, and Turner Foods Corporation. It also created a real estate development company called Alandco.

In effort to improve quality, it adapted a Japanese-inspired quality control process, which in turn improved the company's customer complaints and decreased downtime. In exchange for being the sole provider of a commodity and existing without competition, public utilities are subject to federal regulation of prices and returns generally using the capital asset pricing model. Soon after initiation, federal regulations had spread to encompass capacity planning, power generation & distribution, and what types of other non-utility business the companies were permitted to engage in. Eventually, laws came into effect that stripped away layers of the monopoly and thus came to be known as "deregulations"

The deregulation of the utility industry was the first factor which began to change the competitive marketplace of the utility industry. Due to the fuel crisis of the 1970's the government wanted to increase market efficiencies as the country was heavily reliant on foreign supplies of fuel to create energy. PURPA and NEPA acts were created to allow competition and drive down fuel costs. This also created losses for the utilities which lead to the introduction of Broadhead.

James Broadhead was brought into FPL and developed a long range strategic plan to consolidate, streamline and focus on the core. He sold off non utility businesses, invested in new facilities, improved existing facilities and flattened the organizational structure.

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