As one of the biggest electric utility groups in America, FPL has an impressive revenue and investment portfolio. The company’s dividend payout ratio is also one of the highest among companies of its kind. The company has managed to pay dividends to its shareholders for 47 consecutive years. FPL’s dividend ratio is also one of the most remarkable at the ratio of approximately 90% as compared to an average of 77% among its peers.
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For interested investors, the company operates with a debt to total assets ratio of 46.4%, which is a good indicator when it comes to performance. In this scenario, the company is seeking to distribute dividends to investors while putting all the relevant factors into consideration. This report analyses the case study on Dividended Policy at FPL Group Inc., and the factors that impact any dividned-related decisions at the company.
It is important to analyze the main issue in regards to FPL’s situation. Some of the factors that have made the electric utility industry unique include its sequential mode of production, which includes generation, transmission, and distribution. FPL has enjoyed immense success in this industry because in the past state and federal agencies have often acted as regulators when it comes to operations of utility companies.
Furthermore, several laws have been put in place to ensure that the utility industry only diversify in a manner that is in the best public interest. FPL’s situation in 1995 comes in the aftermath of deregulation efforts that mostly occurred during the 1970s and 1980s, whereby the monopoly of various players within the utility industry was compromised. FPL has to consider the factor that changes in regulation have led to the disenfranchisement of electric utility companies especially in the face of emerging competition. In 1994, even distribution of electricity is under stiff competition as a result to deregulation measures.
By the year 1996, customers in California will be at liberty to buy electricity from other companies other than the local monopolies. It is also expected that by the year 2006, it will be possible for customers to a have a wide range of choices to choose from.
FPL chose a straightforward approach when it was seeking a solution to its dividend policy. The advent of competition has led to big losses for the major utility companies when it comes to market value, with overall losses reaching a combined $1.8 billon. FPL is forced to reconsider its dividend policy in the face of these developments. First, deregulation means that whole utility industry will be reshaped thereby forcing the company to make quick and effective adaptations.
The fact that Florida is not yet affected by retail aspects of utility distribution like the other 23 states across the United States gives the company ample time for restructuring. On the other hand, the logical development is that FPL will be facing stiff competition in a few years. Therefore, the company’s dividend policy should align with these expected developments.
FPL is right when it focuses on the recent developments within the national-wide utility industry. For instance, the concern that deregulating the industry will most likely decrease the company’s market share is a major priority for the company. The implication of this development is that FPL will have to contend with lower profit margins. The priority for the company is to brace itself for competition from companies within Florida as well as other out-of-state providers.
In regards to the company’s dividend policy, FPL should focus on retaining a bigger percentage of its earnings than it has in recent years. Increased revenue retention is expected to prepare the company to deal with imminent competition. The company’s ability to face incoming competition is also important to shareholders. Cutting dividends provides the company with enough revenue to enable it deal with expected changes within the industry. On the other hand, the company’s ability to maintain a high payout ratio is not a priority for the company in the face of a realigning industry and retail wheeling possibilities.
In the course of this analysis, it is important to compare FPL’s scenario with that of a similar company, Oklahoma-based General Electric (OGE). OGE indicates a strong payout ratio that has also been strong in past, but one that has decreased in the last four years. FPL indicates a similar trend, one that can be attributed to increasing debt ratios, which have decreased from.67 to.64 from 1989 to 1993. Using too much cash to invest in its activities has translated into an annual cash balance of about $127,330,000 over the last five years. This is an indication that the company is using too much cash from debts. Withholding dividends would make FPL use more cash for its investment thereby improving the company’s return on investment.
Overall, FPL made the right decision when it withheld a dividend payout to the shareholders. The goal of offering dividend payouts to customers is to ensure that the company’s wealth is returned to shareholders. These payouts give investors an incentive to keep investing in the company. However, in this unique situation diminishing market share will drop the value of the FPL and discourage investors at the same time. It would be more fruitful for the company to strategize on its dividend policy with the view of ensuring the company’s survival in future.